Copyrights to papers in the Duke Economics Working Paper Archive remain with the authors or their assignees. Archive users may download papers and produce them for their own personal use, but downloading of papers for any other activity, including reposting to other electronic bulletin boards or archives, may not be done without the written consent of the authors.

Duke Economics Working Paper #00-21

Market Power, Growth and Unemployment


Pietro F. Peretto

Abstract

Unemployment occurs when some agents, say unions, have control over the wage and set it above the market-clearing level. In other words, it is generated by their exercise of market power. What if, in addition, firms have control over prices in the product market? In this case, market power of wage setters interacts with market power of price setters. Understanding this interaction sheds new light on the effects of policy interventions on unemployment and growth. Reforms that result in lower labor costs reduce unemployment and boost growth because they expand the scale of the economy and generate more competition in the product market. The reduction in unemployment is larger than one would expect if the pro-competitive effect of the reforms were ignored. These reforms, thus, are even more attractive when one considers the endogenous structure of the product market. If they are implemented jointly with a reduction of barriers to innovation in the product market, an even larger reduction in unemployment and increase in growth is achieved.

Keywords: Market Power, Market Structure, Growth, Unemployment

JEL: E10, L16, O31, O40

Retrieve document:

37 pages

  Help on downloading documents