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Mass Consumption, Exclusion and Unemployment

  • Foellmi, Reto
  • Zweimüller, Josef

We introduce non-homothetic preferences into a general equilibrium model of monopolistic competition and explore the impact of income inequality on the medium-run macroeconomic equilibrium. We find that (i) a sufficiently high extent of inequality divides the economy into mass consumption sectors (where firms charge low prices and hire many workers) and exclusive sectors (where firms charge high prices and hire few workers). (ii) High inequality may lead to a situation of underemployment and that underemployment could be "Keynesian" in the sense that it cannot be cured by downward-flexible real wages. (iii) A redistribution of income from rich to poor (by means of progressive taxation) leads to higher employment and such a redistribution is Pareto-improving. (iv) An exogenous increase in (minimum) real wages have a cost effect (that lets firms reduce their employment) and a purchasing power effect (that creates an incentive for mass production and raises aggregate employment) with ambiguous net effects. (v) The economy may feature multiple equilibria where full-employment and unemployment equilibria co-exist.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5824.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5824
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  1. Benabou, R., 1996. "Inequality and Growth," Working Papers 96-22, C.V. Starr Center for Applied Economics, New York University.
  2. Falkinger, Josef, 1994. "An Engelian model of growth and innovation with hierarchic consumer demand and unequal incomes," Ricerche Economiche, Elsevier, vol. 48(2), pages 123-139, June.
  3. Silvestre, Joaquim, 1990. "There May Be Unemployment When the Labour Market Is Competitive and the Output Market Is Not," Economic Journal, Royal Economic Society, vol. 100(402), pages 899-913, September.
  4. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1001-1026, October.
  5. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1990. "On Monopolistic Competition and Involuntary Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 895-919, November.
  6. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  7. Devashish Mitra & Vitor Trindade, 2003. "Inequality and Trade," NBER Working Papers 10087, National Bureau of Economic Research, Inc.
  8. Kiminori Matsuyama, 2000. "The rise of mass consumption societies," LSE Research Online Documents on Economics 6656, London School of Economics and Political Science, LSE Library.
  9. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-41, March.
  10. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
  11. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
  12. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  13. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-98, December.
  14. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  15. Dehez, Pierre, 1985. "Monopolistic equilibrium and involuntary unemployment," Journal of Economic Theory, Elsevier, vol. 36(1), pages 160-165, June.
  16. Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 941-960.
  17. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  18. Gilles Saint-Paul, 2006. "Distribution and Growth in an Economy with Limited Needs: Variable Markups and 'the End of Work'," Economic Journal, Royal Economic Society, vol. 116(511), pages 382-407, 04.
  19. Foellmi, Reto & Zweimuller, Josef, 2004. "Inequality, market power, and product diversity," Economics Letters, Elsevier, vol. 82(1), pages 139-145, January.
  20. Chol-Won Li., . "Inequality and Growth: A Schumpeterian Perspective," Working Papers 9609, Business School - Economics, University of Glasgow, revised Feb 1998.
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