General Equilibrium Effects and Voting into a Crisis

39 Pages Posted: 28 Jul 2004

See all articles by Hans-Jorg Beilharz

Hans-Jorg Beilharz

University of Heidelberg - Department of Economics

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)

Date Written: June 2004

Abstract

We show that in democracies insufficient recognition of general equilibrium effects can lead to a crisis. We consider a two-sector economy in which a majoritarian political process determines governmental regulation in one sector: a minimum nominal wage. If voters recognize general equilibrium feedbacks, workers across sectors form a majority and will favor market-clearing wages. If voters only take into account direct effects in the regulated sector, workers in the other sector are willing to vote for wage rises in each period since they also reckon with higher real wages for themselves. The political process leads to constantly rising unemployment and tax rates. The resulting crisis may trigger new insights into economic relationships on the part of the voters and may reverse bad times.

Keywords: Awareness of general equilibrium effects, unemployment, democracies, crises, rise and fall of market distortions

JEL Classification: D72, D83, E24, J30

Suggested Citation

Beilharz, Hans-Jorg and Gersbach, Hans, General Equilibrium Effects and Voting into a Crisis (June 2004). CEPR Discussion Paper No. 4454. Available at SSRN: https://ssrn.com/abstract=570183

Hans-Jorg Beilharz

University of Heidelberg - Department of Economics ( email )

Grabengasse 14
D-69117 Heidelberg
Germany

Hans Gersbach (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
12
Abstract Views
1,383
PlumX Metrics