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Wage setting and unemployment in a general equilibrium model

Author

Listed:
  • Michele Gori

    (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)

  • Antonio Villanacci

    (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)

Abstract

The purpose of the paper is to argue that exogenous changes lowering wages may imply an increase of unemployment. To support that viewpoint, we use a general equilibrium approach. In that framework, we substitute the labour market clearing equation, which by very definition insures full employment, with the assumption that wages depend on employment and a variable representing all the other exogenous factors influencing the outcome of wage setting. We assume that an increase of that variable determines a decrease of wage for any given level of employment. We further assume that firms compete strategically in the labour market. After having proved there is a unique equilibrium for each economy, we show that an increase of the above mentioned residual variable may cause in equilibrium a decrease in real wages and wage bill along with an increase in unemployment rates and profits. That result suggests what are the effects of a large variety of policies analyzed in the current debate on the role of labour market institution.

Suggested Citation

  • Michele Gori & Antonio Villanacci, 2012. "Wage setting and unemployment in a general equilibrium model," Working Papers - Mathematical Economics 2012-04, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:flo:wpaper:2012-04
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    unemployment; wage setting function; income distribution; general equilibrium.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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