Involuntary Unemployment Under Ongoing Nominal Wage Rate Decline in Overlapping Generations Model

We examine positive or negative real balance effect (or so-called Pigou effect) by falls in the nominal wage rate and the prices of the goods in situations where there is involuntary unemployment using a three-generations overlapping generations model with childhood period and pay-as-you go pension system for the older generation consumers. We will show that if the net savings of the younger generation consumers are larger than their debts due to consumption in their childhood period, there exists positive real balance effect and the employment increases by a fall in the nominal wage rate; on the other hand, if the net savings of the younger generation consumers are smaller than their debts, there exists negative real balance effect and the employment decreases by a fall in the nominal wage rate.

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Involuntary Unemployment in a Neoclassical Model

Studia Universitatis Babe-Bolyai Oeconomica ◽

10.2478/subboec-2020-0007 ◽

2020 ◽

Vol 65 (2) ◽

pp. 12-28

Author(s):

Yasuhito Tanaka

Keyword(s):

Wage Rate ◽

Utility Maximization ◽

Overlapping Generations ◽

Monopolistic Competition ◽

Returns To Scale ◽

Profit Maximization ◽

Nominal Wage ◽

Olg Model ◽

Neoclassical Model ◽

Involuntary Unemployment

AbstractWe show the existence of involuntary unemployment without assuming wage rigidity using a neoclassical model of consumption and production. We consider a case of indivisible labor supply and increasing returns to scale under monopolistic competition. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations (OLG) model with two or three generations. In a two-periods OLG model it is possible that a reduction of the nominal wage rate reduces unemployment. However, if we consider a three-periods OLG model including a childhood period, a reduction of the nominal wage rate does not necessarily reduce unemployment.

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The impossibility of involuntary unemployment in an overlapping generations model with rational expectations

Journal of Economic Theory ◽

10.1016/0022-0531(92)90101-m ◽

1992 ◽

Vol 58 (1) ◽

pp. 61-76 ◽

Cited By ~ 6

Author(s):

Christian Schultz

Keyword(s):

Rational Expectations ◽

Overlapping Generations ◽

Overlapping Generations Model ◽

Involuntary Unemployment

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Involuntary unemployment in overlapping generations model due to instability of the economy and fiscal policy

SSRN Electronic Journal ◽

10.2139/ssrn.3824219 ◽

2021 ◽

Author(s):

Yasuhito Tanaka

Keyword(s):

Fiscal Policy ◽

Overlapping Generations ◽

Overlapping Generations Model ◽

Involuntary Unemployment

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The Fallacy of Wage Cuts and Keynes's Involuntary Unemployment

Journal of the History of Economic Thought ◽

10.1080/10427710701514737 ◽

2007 ◽

Vol 29 (3) ◽

pp. 309-329 ◽

Cited By ~ 4

Author(s):

John Levendis

Keyword(s):

Wage Rate ◽

Full Employment ◽

Economic Problem ◽

Nominal Wage ◽

Involuntary Unemployment ◽

Narrative History ◽

History Of ◽

Definition Of ◽

Wage Cuts

The lingering economic problem for economists in the 1920s and 1930s was unemployment. What caused it? More importantly, what could cure it? John Maynard Keynes's work offered new insights regarding both the reasons for, and the cures of, lingering and massive unemployment—what Keynes called “involuntary unemployment.” Keynes's definition of the term evolved as he gradually came to realize the role of the fallacy of composition in explaining why nominal wage rate adjustments might not induce full employment. I argue that it was Richard Kahn's multiplier article, more than anything, which guided Keynes's own understanding of the phenomenon. This paper, then, is a narrative history of how Keynes came to grips with the unprecedented level of unemployment in the 1920s and '30s interpreted through the lens of the Kahnian multiplier.

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INDIVISIBLE LABOR SUPPLY AND INVOLUNTARY UNEMPLOYMENT: MONOPOLISTIC COMPETITION MODEL

The Singapore Economic Review ◽

10.1142/s0217590820500307 ◽

2020 ◽

pp. 1-14

Author(s):

YASUHITO TANAKA

Keyword(s):

Labor Supply ◽

Utility Maximization ◽

Overlapping Generations ◽

Monopolistic Competition ◽

Returns To Scale ◽

Profit Maximization ◽

Wage Rigidity ◽

Overlapping Generations Model ◽

Involuntary Unemployment ◽

Constant Returns To Scale

This paper is an attempt to provide a micro-theoretical basis for Keynesian economics while maintaining as much of the neoclassical framework as possible, such as utility maximization for consumers and profit maximization for firms. We show the existence of involuntary unemployment without assuming wage rigidity when labor supplies of individuals are indivisible. We derive involuntary unemployment using an overlapping generations model under monopolistic competition with constant returns to scale technology and indivisible labor supply.

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