GROWTH, UNEMPLOYMENT AND THE WAGE SETTING PROCESS.

< 4(i+_α) [(1 — α)(1 + g) — γ] then 70 holds.
only if γ < ^α(^1-+5α^+g). If 0 < u < 1 then

. In this case the two eigen values λ_i, λ₂ are

that λ₁ + λ₂ = a + d > 0 and λ₁ λ₂ = ad — bc > 0. These two inequalities imply
λ₁ > 0 and λ₂ > 0. Now if λ₁ + λ₂ = a + d < 1 then we have that 0 < λ₁ < 1
and 0 < λ₂ < 1 which implies convergence to the steady state if both are real.
Using 69 we obtain:

²Y ^{+ [(}1 ^{- α})(1+ g) — γ]U
γ + α^{[(1 - α})(^{1 +} g )^- γ] u '

Using 71 we have that λ1 + λ2 < 1 if and only if:

γ< ∩~^2[(1 — α)(1 + g) — γ]¹.                (72)

αu

If 0 < u < 1 and γ < ^{(1 α}) [(1 — α)(1 + g) — γ] then 72 holds. Last inequality
holds if and only if γ < (1 — α)²(1 + g). Finally we define

Y' = ^min( ^α(¹-α5(α¹⁺g) ^{, (1} — ^{a)2(1 +} g)).

References

[1] Aghion, P. and Howitt, P. (1994); ”Growth and Unemployment”, Review
of Economic Studies, 61, 477-494.

[2] Bean, Ch. and Pissarides, Ch. (1993); ”Unemployment, consumption and
growth”, European Economic Review, 37, 837-859.

[3] Daveri, F. and Tabellini, G. (1997), ”Unemployment, Growth and Taxation
in Industrial Countries”, Discussion Paper Series, No 1681, International
Macroeconomics, CEPR.

[4] Diamond, P. (1965); ”National Debt in a Neo-classical Growth Model”,
American Economic Review, 55, 1126-1150.

[5] Layard, R. , Nickell, S. and Jackman, R. (1991); ”Unemployment”, Oxford
University Press.

[6] McDonald, I.M. and Solow, R. M.(1981); ”Wage Bargaining and Employ-
ment”, American Economic Review, 71, 896-909.

[7] Oswald, A.J. (1985); ”The Economic Theory of Trade Unions: An Intro-
ductory Survey”, Scandinavian Journal of Economics, 87(2), 160-193.

[8] Pissarides, C.A. (1990); ”Equilibrium Unemployment Theory”, Basil
Blacwell, Oxford.

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