Awareness of General Equilibrium Effects and Unemployment

Hans Gersbach and Achim Schniewind

No 5012, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine wage bargaining in a two-sector economy when the employers and labour unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labour demand effects, low real wages and low unemployment are the result. With an intermediate view, i.e. when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high.

Keywords: Sectoral wage bargaining; Awareness of general equilibirum effects; Unemployment (search for similar items in EconPapers)
JEL-codes: D58 E24 J60 L13 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Working Paper: Awareness of General Equilibrium Effects and Unemployment (2001)
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