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Market power, Growth and Unemployment

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  • Peretto, Pietro F.

Abstract

Unemployment occurs when some agents, say unions, have control over the wage and set it above the market-clearing level. In other words, it is generated by their exercise of market power. What if, in addition, firms have control over prices in the product market? In this case, market power of wage setters interacts with market power of price setters. Understanding this interaction sheds new light on the effects of policy interventions on unemployment and growth. Reforms that result in lower labor costs reduce unemployment and boost growth because they expand the scale of the economy and generate more competition in the product market. The reduction in unemployment is larger than one would expect if the pro-competitive effect of the reforms were ignored. These reforms, thus, are even more attractive when one considers the endogenous structure of the product market. If they are implemented jointly with a reduction of barriers to innovation in the product market, an even larger reduction in unemployment and increase in growth is achieved.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 00-21.

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Date of creation: 2000
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Handle: RePEc:duk:dukeec:00-21

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Cited by:
  1. Palokangas, Tapio K., 2003. "Labour Market Regulation, Productivity-Improving R&D and Endogenous Growth," IZA Discussion Papers 720, Institute for the Study of Labor (IZA).
  2. Ebell, Monique & Haefke, Christian, 2003. "Product Market Deregulation and Labor Market Outcomes," IZA Discussion Papers 957, Institute for the Study of Labor (IZA).
  3. Carmeci, Gaetano & Mauro, Luciano, 2003. "Imperfect labor market and convergence: theory and evidence for some OECD countries," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 837-856, November.
  4. Gersbach, Hans & Schniewind, Achim, 2002. "Uneven Technical Progress and Unemployment," IZA Discussion Papers 478, Institute for the Study of Labor (IZA).
  5. Lutz G. Arnold, 2006. "Does the Choice between Wage Inequality and Unemployment Affect Productivity Growth?," German Economic Review, Verein für Socialpolitik, vol. 7, pages 87-112, 02.
  6. Palokangas, Tapio K., 2005. "Economic Integration, Market Power and Technological Change," IZA Discussion Papers 1592, Institute for the Study of Labor (IZA).

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