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Market power, Growth and Unemployment


  • Peretto, Pietro F.


Unemployment occurs when some agents, say unions, have control over the wage and set it above the market-clearing level. In other words, it is generated by their exercise of market power. What if, in addition, firms have control over prices in the product market? In this case, market power of wage setters interacts with market power of price setters. Understanding this interaction sheds new light on the effects of policy interventions on unemployment and growth. Reforms that result in lower labor costs reduce unemployment and boost growth because they expand the scale of the economy and generate more competition in the product market. The reduction in unemployment is larger than one would expect if the pro-competitive effect of the reforms were ignored. These reforms, thus, are even more attractive when one considers the endogenous structure of the product market. If they are implemented jointly with a reduction of barriers to innovation in the product market, an even larger reduction in unemployment and increase in growth is achieved.

Suggested Citation

  • Peretto, Pietro F., 2000. "Market power, Growth and Unemployment," Working Papers 00-21, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:00-21

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    References listed on IDEAS

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    Cited by:

    1. Carmeci, Gaetano & Mauro, Luciano, 2003. "Imperfect labor market and convergence: theory and evidence for some OECD countries," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 837-856, November.
    2. Gersbach, Hans & Schniewind, Achim, 2002. "Uneven Technical Progress and Unemployment," IZA Discussion Papers 478, Institute for the Study of Labor (IZA).
    3. Palokangas, Tapio K., 2003. "Labour Market Regulation, Productivity-Improving R&D and Endogenous Growth," IZA Discussion Papers 720, Institute for the Study of Labor (IZA).
    4. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and labor market outcomes," Economics Working Papers 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
    5. Lutz G. Arnold, 2006. "Does the Choice between Wage Inequality and Unemployment Affect Productivity Growth?," German Economic Review, Verein für Socialpolitik, vol. 7, pages 87-112, February.
    6. Palokangas, Tapio K., 2005. "Economic Integration, Market Power and Technological Change," IZA Discussion Papers 1592, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General


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