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Externalities in Wage Formation and Equilibrium Unemployment

Author

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  • de la Croix, David

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

Abstract

We provide a multi-sector general equilibrium model in which externalities among sectors arise trough decentralized wage bargaining. Without externalities, equilibrium unemployment is only a function of firms’ market power and of demand uncertainty. With externalities, unemployment is higher. It is increasing with union power even thought bargaining is efficient. Demand does not modify the magnitude of the loss of efficiency. However, when externalities are present, sectorial demand shocks modify the allocation of output across sectors ; this reallocation may increase or decrease unemployment depending on the initial situation of the economy.

Suggested Citation

  • de la Croix, David, 1991. "Externalities in Wage Formation and Equilibrium Unemployment," LIDAM Discussion Papers IRES 1991020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1991020
    as

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