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The dynamics of wages and employment in a model of monopolistic competition and efficient bargaining

  • Pasquale Commendatore
  • Ingrid Kubin

Modern macroeconomic models with a Keynesian flavour usually involve nominal rigidities in wages and commodity prices. A typical microfoundation recurs to wage bargaining in the labour markets and monopolistic competition in the commodity markets (e.g. Blanchard/Giavazzi). A characteristic feature of those models is that deregulating the labour markets (i.e. reducing the bargaining power of workers and/or reducing the unemployment benefits) increases equilibrium employment; in a symmetric way, deregulating the commodity markets (i.e. reducing the market power of commodity suppliers) increases equilibrium employment as well. However, those models are typically static models which do not specify explicitly the economic process in time. In the following paper, we develop a dynamic macroeconomic model in which commodity markets are characterised by monopolistic competition and labour markets by wage bargaining. In this first version, the number of firms is fixed. The incorporation of firm entry and exit is left for further research. In our analysis the usual equilibrium solution is a fixed point of the dynamic model which exhibits the usual comparative static properties (deregulating the labour and/or the commodity market increases employment). However, depending upon the parameters the fixed point may loose stability through a Flip-bifurcation giving rise to cyclical solutions. We show that commodity and labour market deregulation may lead to instability and lower average employment. This result, valid in a dynamic framework, contrasts with the usual comparative static properties.

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File URL: http://degit.sam.sdu.dk/papers/degit_08/C008_024.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c008_024.

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Length: 41 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:deg:conpap:c008_024
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  1. Nicola GIAMMARIOLI & Julian MESSINA & Thomas STEINBERGER & Chiara STROZZI, 2002. "European Labor Share Dynamics: An Institutional Perspective," Economics Working Papers ECO2002/13, European University Institute.
  2. Blanchard, Olivier J & Giavazzi, Francesco, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labour Markets," CEPR Discussion Papers 2713, C.E.P.R. Discussion Papers.
  3. Calmfors, Lars & Johansson, Åsa, 2001. "Unemployment Benefits, Contract Length And Nominal Wage Flexibility," Seminar Papers 692, Stockholm University, Institute for International Economic Studies.
  4. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  5. Lars Calmfors & Åsa Johansson, 2001. "Unemployment Benefits, Contract Length and Nominal Wage Flexibility," CESifo Working Paper Series 514, CESifo Group Munich.
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