Working Paper: CEPR ID: DP5012
Authors: Hans Gersbach; Achim Schniewind
Abstract: We examine wage bargaining in a two-sector economy when the employers and labour unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labour 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: awareness of general equilibrium effects; sectoral wage bargaining; unemployment
JEL Codes: D58; E24; J60; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| General Equilibrium Bargaining (GEB) (C79) | low unemployment (J68) |
| General Equilibrium Bargaining (GEB) (C79) | low wages (J31) |
| Partial Equilibrium Bargaining (PEB) (C79) | high unemployment (J64) |
| Partial Equilibrium Bargaining (PEB) (C79) | high wages (J31) |
| Partial Equilibrium Bargaining (PEB) (C79) | low employment levels (J68) |
| high wages (J31) | increased unemployment benefits (J65) |
| neglect of general equilibrium effects (D59) | underestimation of negative consequences of high wages (J38) |
| awareness of general equilibrium effects (D50) | influence on bargaining outcomes (C78) |