GROWTH, UNEMPLOYMENT AND THE WAGE SETTING PROCESS.



the unemployment benefit. This unpleasant characteristic can be eliminated
introducing in the program of the government the constraint (1
- τt)wt st.
For simplicity when proving the existence of equilibrium in the next section, we
do not intro duce this contraint in program
Gt .

If the government has a balanced budget constraint and the wage in period
t is greater than the competitive wage then, using ( 12) the effective quantity
of labor employed is given by:

cwt-iLe-1  = c(1 α)1 ( W-1 )Le-ι

At[Atw-α)] α        (1+ g)(At)α1


1 — α

At α cwt-ιLf-ι


wt


1-α


< Nt. (22)


If there is unemployment in periods t - 1 and t it is easy to compute that

Yt -Yt 1

the rate of growth output in period t, yt = tγ t 1, the rate of growth of


employment in period t, lt =
given by:


Le


t


and the rate of unemployment, ut , are


yt =


c(1 α) α


w wt i--

( Att ) α


1=


1-α            1

cAtα (1 - α)α

1 a


(23)


wtα


lt


c(1 α)1 (W-1 ) - 1= t (1 α)wt-i
(1+ g)( At )1                 wt1


(24)


ut = 1


1 — α

At ~ cwt-iLe-i


Nt[


wt
(1-α)


(25)


Note that, from equations ( 23),( 24) and ( 25), if wt increases then yt and
lt decrease and ut increases. Note in fact that the evolution of the output
growth rate is given by the evolution of the wage per unit of effective labor. If
the wage per unit of effective labor increases along time the rate of growth of
output decreases. Note also that if the saving propensity increases, both the
output growth rate and the unemployment rate decreases. Note, finally, that
an increase in the supply of lab or,
Nt, increases the unemployment rate but, if
there is unemployment, do not affect the rate of growth of output.

4 Nash Equilibrium

Definition 4.1 Given wt-ι, τt-ι, γt, and βt; w*, τ* and st is an Nash Equi-
librium if

wt = wt (wt-i t-i*,s,γt);                       (26)

τt = Tt(wt t);                               (27)

st = 'st(wt t).                                 (28)

11



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