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 - τ_t)w_t ≥ s_t.
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:

Note that, from equations ( 23),( 24) and ( 25), if w_t increases then y_t and
l_t decrease and u_t 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, N_t, 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 w_t-ι, τ_t-ι, γ_t, and β_t; w*, τ* and st is an Nash Equi-
librium if

^wt = wt (wt-i ^,τt-i^,τ*^,s↑^,γt);                       ⁽2⁶⁾

τt = Tt(wt ,βt);                               (27)

st = 'st(wt ,βt).                                 (28)

11

<<   8   9   10   11   12   13   14   >>

More intriguing information