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Involuntary unemployment in overlapping generations model due to instability of the economy

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  • Yasuhito Tanaka

Abstract

The existence of involuntary unemployment advocated by J. M. Keynes is a very important problem of the modern economic theory. Using a three-generations overlapping generations model, we show that the existence of involuntary unemployment is due to the instability of the economy. Instability of the economy is the instability of the difference equation about the equilibrium price around the full-employment equilibrium, which means that a fall in the nominal wage rate caused by the presence of involuntary unemployment further reduces employment. This instability is due to the negative real balance effect that occurs when consumers' net savings (the difference between savings and pensions) are smaller than their debt multiplied by the marginal propensity to consume from childhood consumption.

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  • Yasuhito Tanaka, 2020. "Involuntary unemployment in overlapping generations model due to instability of the economy," Papers 2012.12199, arXiv.org.
    • Handle: RePEc:arx:papers:2012.12199
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    References listed on IDEAS

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    1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
    2. Tanaka, Yasuhito, 2020. "Involuntary unemployment as a Nash equilibrium and fiscal policy," MPRA Paper 102049, University Library of Munich, Germany.
    3. Tanaka, Yasuhito, 2020. "Involuntary unemployment under monopolistic competition and fiscal policy for full-employment," MPRA Paper 101479, University Library of Munich, Germany.
    4. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
    5. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    7. Yasuhito Tanaka, 2023. "Indivisible Labor Supply And Involuntary Unemployment: Monopolistic Competition Model," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(06), pages 1953-1966, December.
    8. Marc Lavoie, 2001. "Efficiency Wages in Kaleckian Models of Employment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 23(3), pages 449-464, March.
    9. Tanaka, Yasuhito, 2020. "Fiscal policy under involuntary unemployment," MPRA Paper 102507, University Library of Munich, Germany.
    10. Yasuhito Tanaka, 2020. "Involuntary unemployment with indivisible labor supply under perfect competition," Economics Bulletin, AccessEcon, vol. 40(3), pages 1914-1923.
    11. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
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