Awareness of General Equilibrium Effects and Unemployment

30 Pages Posted: 19 Nov 2001

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Achim Schniewind

University of Heidelberg - Alfred Weber Institute for Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2001

Abstract

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.

Keywords: Sectoral Wage-Bargaining, Awareness of General Equilibrium Effects, Unemployment

JEL Classification: D58, E24, J60, L13

Suggested Citation

Gersbach, Hans and Schniewind, Achim, Awareness of General Equilibrium Effects and Unemployment (November 2001). IZA Discussion Paper No. 394. Available at SSRN: https://ssrn.com/abstract=290901

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Achim Schniewind (Contact Author)

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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