Unemployment_&_Real_Wages
Olivier Blanchard *
February 1998
The following model of unemployment is as basic as it gets. But it allows to dis-
cuss various conceptual and semantic issues, to think about the effects of various
shocks, and get a sense of critical assumptions and specifications.
It is the first of three models I want to develop at the beginning of the course.
The second one introduces capital, and focuses on dynamics of factor prices and
quantities; that model can be taken, with some care, to the data. The focus of the
third is on micro foundations, starting from flows and bargaining.
Labor demand
Firms have the following production function:
Y= XNl-a
O<a<l
where Ar is the level of technology, and other factors such as capital are assumed
constant and ignored for notational simplicity.
Prices are set as a markup over marginal cost
P=(1+p)A纪；
MC=W/ YN
P is the nominal price, equivalently the price level, (1 +p) is the gross markup,
and M C is marginal cost. Under perfect competition,p is equal to zero. Marginal
cost in turn is equal to the nominal wage, W, divided by the marginal product of
labor, YN . |