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

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Author Info
Gaël Giraud
Céline Rochon
Abstract

We present a continuous 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.

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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe02.

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Length: 32
Date of creation: 2008
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Handle: RePEc:sbs:wpsefe:2008fe02

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Keywords: Underemployment Say's law inventories non convex production

Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution

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  4. Olivier Blanchard, 2000. "What Do We Know About Macroeconomics That Fisher And Wicksell Did Not?," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1375-1409, November. [Downloadable!] (restricted)
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  5. Bottazzi, Jean-Marc, 1994. "Accessibility of Pareto optima by Walrasian exchange processes," Journal of Mathematical Economics, Elsevier, vol. 23(6), pages 585-603, November. [Downloadable!] (restricted)
  6. Jean-Marc Bonnisseau & Michael Florig, 2003. "Existence and optimality of oligopoly equilibria in linear exchange economies," Economic Theory, Springer, vol. 22(4), pages 727-741, November. [Downloadable!] (restricted)
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  13. Kamiya, Kazuya, 1988. "On the survival assumption in marginal (cost) pricing," Journal of Mathematical Economics, Elsevier, vol. 17(2-3), pages 261-273, April. [Downloadable!] (restricted)
  14. Champsaur, P. & Cornet, B., 1989. "Walrasian Exchange Processes," Papers 8930, Catholique de Louvain - Center for Operations Research and Economics.
  15. Donald J. Brown & Geoffrey M. Heal, 1978. "Equity, Efficiency and Increasing Returns," Cowles Foundation Discussion Papers 504, Cowles Foundation, Yale University. [Downloadable!]
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  16. Champsaur, Paul & Dreze, Jacques H & Henry, Claude, 1977. "Stability Theorems with Economic Applications," Econometrica, Econometric Society, vol. 45(2), pages 273-94, March. [Downloadable!] (restricted)
  17. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June. [Downloadable!] (restricted)
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