Faculty of Economics and Business Administration Publications Database

A new model of equilibrium involuntary unemployment

Madden, Paul
Volume: 23
Pages: 507 - 527
Month: March
ISSN-Print: 0938-2259 | Economic Theory
Link External Source: Online Version
Year: 2004
Keywords: Involuntary unemployment; Multi-stage game; Imperfect competition

We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect Nash equilibria involving unemployment and positive profits. A firm does not undercut the equilibrium wage since then high wage firms would attract its workers, thus forcing the undercutting firm out of both markets. Full employment equilibria are payoff dominated by unemployment equilibria, and the arguments are robust to decreasing returns. Copyright Springer-Verlag Berlin/Heidelberg 2004.