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Awareness of General Equilibrium Effects and Unemployment

  • Gersbach, Hans
  • Schniewind, Achim

We examine wage bargaining in a two-sector economy when the employers and labour unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labour demand effects, low real wages and low unemployment are the result. With an intermediate view, i.e. when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5012.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5012
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  1. Oswald Andrew J., 1996. "A Conjecture on the Explanation for High Unemployment in the Industrialized Nations : Part I," The Warwick Economics Research Paper Series (TWERPS) 475, University of Warwick, Department of Economics.
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  19. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 23-43.
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