Natural rate of unemployment and efficiency: a dynamic analysis with flexible prices and increasing returns

Gaël Giraud and Céline Rochon
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Céline Rochon: Saîd Business School, University of Oxford

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: We present a continuous time non-tatonnement process for frictionless and perfectly competitive markets with (possibly non-convex) production, where the natural rate of unemployment (NRU) emerges as the asymptotic value of unemployment. Consumers and producers are myopic and repeatedly participate in Mertens' (2003) limit-price mechanism. We show that underemployment and unsold inventories can survive along the solution paths of our dynamics - the hallmark of the failure of Say's law. The following paradox then appears : a non zero NRU is compatible with Pareto-optimality and conversely, full employment is compatible with sub-optimality. Nevertheless, contrary to the usual wisdom of job searching models, we show that a non-zero NRU is not necessary in order to get convergence towards an efficient rest-point. Indeed, each trade-and-production path of our price-quantity dynamics converges to some infinitesimal Pareto optimal point provided there are no unsold inventories at the limit

Keywords: Underemployment; Say's law; inventories; non-convex production (search for similar items in EconPapers)
JEL-codes: D11 D21 D51 E24 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-04
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Related works:
Working Paper: Natural rate of unemployment and efficiency: A dynamic analysis with flexible prices and increasing returns (2008)
Working Paper: Natural rate of unemployment and efficiency: A dynamic analysis with flexible prices and increasing returns (2008)
Working Paper: Natural rate of unemployment and efficiency: a dynamic analysis with flexible prices and increasing returns (2007)
Working Paper: Natural rate of unemployment and efficiency: a dynamic analysis with flexible prices and increasing returns (2007)
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