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Natural rate of unemployment and efficiency: A dynamic analysis with flexible prices and increasing returns

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  • Gael Giraud
  • Celine Rochon

Abstract

We present a continous time non tatonnement process for frictionless and perfectly competitive markets with (possibly non convex) production, where the natural rate of unemployment (NRU) emerges as the asymptotic value of unemployment. Consumers and producers are myopic and repeatedly participate in Mertens' (2003) limit-price mechanism. We show that underemployment and unsold inventories can survive along the solution paths of our dynamics - the hallmark of the failure of Say's law. The following paradox appears: A nonzero NRU is compatible with Pareto optimality; conversely, full employment is compatible with sub optimality. Nevertheless, each trade and production path of our price quantity dynamics converges to some infinitesimal Pareto optimal point as long as there are no unsold inventories at the limit.

Suggested Citation

  • Gael Giraud & Celine Rochon, 2008. "Natural rate of unemployment and efficiency: A dynamic analysis with flexible prices and increasing returns," Economics Series Working Papers 2008fe02, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2008fe02
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    References listed on IDEAS

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    1. Jean-Marc Bonnisseau & Michael Florig, 2003. "Existence and optimality of oligopoly equilibria in linear exchange economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(4), pages 727-741, November.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Underemployment; Say's Law; Inventories; Non Convex Production;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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