Awareness of General Equilibrium Effects and Unemployment

34 Pages Posted: 24 Aug 2005

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: April 2005

Abstract

We examine wage bargaining in a two-sector economy when the employers and labor unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labor demand effects, low real wages and low unemployment are the 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 simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high.

Keywords: Sectoral wage bargaining, awareness of general equilibirum effects, unemployment

JEL Classification: D58, E24, J60, L13

Suggested Citation

Gersbach, Hans and Schniewind, Achim, Awareness of General Equilibrium Effects and Unemployment (April 2005). CEPR Discussion Paper No. 5012. Available at SSRN: https://ssrn.com/abstract=772744

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

Achim Schniewind

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

Grabengasse 14
Heidelberg, D-69117
Germany

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