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Mass Consumption, Exclusion, and Unemployment

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  • Reto Foellmi
  • Joseph Zweim�ller

Abstract

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.

Suggested Citation

  • Reto Foellmi & Joseph Zweim�ller, 2006. "Mass Consumption, Exclusion, and Unemployment," IEW - Working Papers 296, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:296
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    References listed on IDEAS

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    Cited by:

    1. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    2. Sascha Becker & Peter Egger, 2013. "Endogenous product versus process innovation and a firm’s propensity to export," Empirical Economics, Springer, vol. 44(1), pages 329-354, February.
    3. Reto Foellmi & Josef Zweimüller, 2011. "Exclusive Goods and Formal-Sector Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 242-272, January.
    4. Jochen Michaelis, 2013. "Und dann werfen wir den Computer an – Anmerkungen zur Methodik der DSGE-Modelle," MAGKS Papers on Economics 201323, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item

    Keywords

    Income distribution; monopolistic competition; mark-ups; exclusion;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • D30 - Microeconomics - - Distribution - - - General
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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