Wage Relativities and the Natural Range of Unemployment
If workers are concerned about their relative wage, this can give rise to continuum of natural rates of unemployment that are perfect foresight equilibria. These equilibria can be Pareto ranked in the same order as their level of employment. Which equilibrium is reached depends upon expectations in a bootstraps way so that sunspots can induce fluctuations and monetary policy can bring about shifts between equilibria. Due to coordination failures, perfectly rational agents may make systematic forecasting errors even in the absence of intrinsic uncertainty. If a few agents have adaptive expectations, the economy behaves in a Keynesian manner within the natural range, while being classical at its extremes. Copyright 1990 by Royal Economic Society.
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Volume (Year): 100 (1990)
Issue (Month): 400 (Supplement,)
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