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The dynamics of wages and employment in a model of monopolistic competition and efficient bargaining

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  • Pasquale Commendatore
  • Ingrid Kubin

Abstract

Modern macroeconomic models with a Keynesian flavour usually involve nominal rigidities in wages and commodity prices. A widely used conceptual framework is specifying a wage-setting and a price setting equation, while a more explicit microfoundation recurs to wage bargaining in the labour markets and monopolistic competition in the commodity markets; (Blanchard and Giavazzi, 2001). Characteristic for those approaches is that deregulating the labour markets (i.e. reducing the bargaining power of workers and/or reducing the unemployment benefits) and/or deregulating the commodity markets (i.e. reducing the market power of commodity suppliers) increases equilibrium employment. However, those models are typically static models which do not specify explicitly the economic process in time. In the following paper, we develop a dynamic macroeconomic model in which commodity markets are characterised by monopolistic competition and labour markets by wage bargaining. The number of firms is fixed; the incorporation of firm entry and exit is left for further research. In our analysis the equilibrium solution is a fixed point of the dynamic model which exhibits the usual comparative static properties (deregulating the labour and/or the commodity market increases employment). However, depending upon the parameters the fixed point may loose stability through a Flip-bifurcation giving rise to cyclical solutions. We show analytically that commodity and labour market deregulation may lead to instability; in numerical simulation we even found cases in which deregulation leads to lower average employment. Both results, valid in a dynamic framework, contrast with the usual comparative static properties.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c008_024.

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Length: 41 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:deg:conpap:c008_024

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References

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  1. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc.
  2. Nicola GIAMMARIOLI & Julian MESSINA & Thomas STEINBERGER & Chiara STROZZI, 2002. "European Labor Share Dynamics: An Institutional Perspective," Economics Working Papers ECO2002/13, European University Institute.
  3. Calmfors, Lars & Johansson, Åsa, 2001. "Unemployment Benefits, Contract Length And Nominal Wage Flexibility," Seminar Papers 692, Stockholm University, Institute for International Economic Studies.
  4. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  5. Lars Calmfors & Åsa Johansson, 2001. "Unemployment Benefits, Contract Length and Nominal Wage Flexibility," CESifo Working Paper Series 514, CESifo Group Munich.
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Cited by:
  1. Gerlinde Fellner & Matthias Sutter, 2005. "Causes, consequences, and cures of myopic loss aversion - An experimental investigation," Papers on Strategic Interaction 2005-15, Max Planck Institute of Economics, Strategic Interaction Group.
  2. Aleksandra Riedl & Silvia Rocha-Akis, 2008. "Testing the tax competition theory: How elastic are national tax bases in Western Europe?," Working Papers 142, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Pasquale Commendatore & Ingrid Kubin & Carmelo Petraglia, 2007. "Footloose capital and productive public services," Department of Economics Working Papers wuwp111, Vienna University of Economics, Department of Economics.
  4. Engelbert Stockhammer & Paul Ramskogler, 2007. "Uncertainty and exploitation in history," Department of Economics Working Papers wuwp104, Vienna University of Economics, Department of Economics.
  5. Annemarie Steidl & Engelbert Stockhammer, 2007. "Coming and leaving. Internal mobility in late Imperial Austria," Department of Economics Working Papers wuwp107, Vienna University of Economics, Department of Economics.
  6. Engelbert Stockhammer & Paul Ramskogler, 2008. "Post Keynesian economics - how to move forward," Department of Economics Working Papers wuwp124, Vienna University of Economics, Department of Economics.
  7. Theresa Grafeneder-Weissteiner & Klaus Prettner, 2009. "Agglomeration and population ageing in a two region model of exogenous growth," Working Papers 0901, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  8. Theresa Grafeneder-Weissteiner, 2010. "Demographic change, growth and agglomeration," Department of Economics Working Papers wuwp132, Vienna University of Economics, Department of Economics.
  9. Özlem Onaran, 2007. "International financial markets and fragility in the Eastern Europe: "can it happen" here?," Department of Economics Working Papers wuwp108, Vienna University of Economics, Department of Economics.

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