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Awareness of General Equilibrium Effects and Unemployment

Listed author(s):
  • Gersbach, Hans

    ()

    (ETH Zurich)

  • Schniewind, Achim

    ()

    (Heidelberg University)

We examine wage-bargaining in a two-sector economy when employers and labor unions in each sector are not always aware of all general equilibrium feedback effects. We show analytically that if agents only consider labor demand effects, low real wages and low unemployment 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 considered at once, low real wages and low unemployment again result. The assumption that unions and employers’ federations are not able to incorporate all feedback effects from other sectors may explain the persistence of high unemployment in Europe.

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File URL: http://ftp.iza.org/dp394.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 394.

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Length: 31 pages
Date of creation: Nov 2001
Publication status: published as 'Collective Bargaining, Wareness of General Equilibrium Effects, and Unemployment' in: International Economic Review, 2011, 52 (3), 693 - 712
Handle: RePEc:iza:izadps:dp394
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  1. Saint-Paul, Gilles, 1995. "Some political aspects of unemployment," European Economic Review, Elsevier, vol. 39(3-4), pages 575-582, April.
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  9. Drew Fudenberg & David K. Levine, 1998. "The Theory of Learning in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061945, July.
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  13. Saint-Paul, Gilles, 1994. "Searching for the Virtues of the European Model," CEPR Discussion Papers 950, C.E.P.R. Discussion Papers.
  14. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  15. 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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  17. Paul R. Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
  18. Gersbach, Hans & Schniewind, Achim, 2001. "Learning of General Equilibrium Effects and the Unemployment Trap," IZA Discussion Papers 254, Institute for the Study of Labor (IZA).
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