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Awareness of General Equilibrium Effects and Unemployment

  • 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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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
Date of revision:
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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