When More Flexibility Yields More Fragility: The Microfoundations of Keynesian Aggregate Unemployment

36 Pages Posted: 2 Mar 2016

See all articles by Giovanni Dosi

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Marcelo C. Pereira

University of Campinas

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Maria Enrica Virgillito

Scuola Superiore Sant'Anna di Pisa

Date Written: February 28, 2016

Abstract

Wages are an element of cost crucially affecting the competitiveness of individual firms. But the wage bill is also a crucial element of aggregate demand. Hence it could be that more “flexible” and fluid labour markets, while allowing for faster inter-firm reallocation of labour, may also render the whole economic system more fragile, more prone to recession, more volatile. In this work we investigate some conditions under which such a conjecture applies. The paper presents an agent-based model that investigates the effects of two “archetypes of capitalism”, in terms of regimes of labour governance – defined by the mechanisms of wage determination, firing, labour protection and productivity gains sharing – upon (i) labour market regularities and (ii) macroeconomic dynamics (long-term rates of growth, GDP fluctuations, unemployment rates, inequality, etc..). The model is built upon the “Keynes meets Schumpeter” family of models (Dosi et al., 2010), explicitly incorporating different microfounded labour market regimes. Our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes with higher and smoother growth.

Keywords: Involuntary Unemployment, Aggregate Demand, Wage Determination, Labour Market Regimes, Keynesian Coordination Failures, Agent-Based Models

JEL Classification: C63, E02, E12, E24

Suggested Citation

Dosi, Giovanni and Pereira, Marcelo and Roventini, Andrea and Virgillito, Maria Enrica, When More Flexibility Yields More Fragility: The Microfoundations of Keynesian Aggregate Unemployment (February 28, 2016). Available at SSRN: https://ssrn.com/abstract=2739346 or http://dx.doi.org/10.2139/ssrn.2739346

Giovanni Dosi (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

HOME PAGE: www.lem.sssup.it

Marcelo Pereira

University of Campinas ( email )

Rua Pitagoras 353
Campinas, Campinas 13088-857
Brazil

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Maria Enrica Virgillito

Scuola Superiore Sant'Anna di Pisa ( email )

Biblioteca Scuola Superiore Sant'Anna
Piazza Martiri della Liberta, n. 33
Pisa, 56127
Italy

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