Long Run Unemployment, Growth And Inflation

Abstract

This paper presents an endogenous growth model of a monetary economy with unemployment due to the existence of unions in the labor market. We assume that total factor productivity depends on a public input and that the services derived from this public input depend on the level of employment, i.e., there is an externality accruing from the average amount of employment. We show that, if this externality is positive then an expansive monetary policy decreases unemployment. On the contrary, if the externality is negative then a contractive monetary policy or a decrease in the tax rates decrease unemployment. If there is no such externality, the model predicts a vertical long run Philips curve as the one obtained with a competitive labor market but this relation vanishes if the externality exists.