Abstract
In this paper we show the existence of involuntary unemployment based on consumers’ utility maximization and firms’ profit maximization behavior under perfect competition with decreasing or constant returns to scale technology using a three-period overlapping generations (OLG) model with a childhood period as well as younger and older periods, and analyze the effects of fiscal policy financed by tax and budget deficit (or seigniorage) to realize full-employment under a situation with involuntary unemployment. We show the following results. 1) In order to maintain the steady state where employment increases at some positive rate, we need a budget deficit (Proposition 1). 2) If the full-employment state is realized, we do not need budget deficit to maintain full-employment (Proposition 2).
Highlights
In this paper we analyze the effects of fiscal policy to realize full-employment under a situation with involuntary unemployment
Otaki (2009) says that there exists involuntary unemployment for two reasons: i) the nominal wage rate is set above the reservation nominal wage rate; and ii) the employment level and economic welfare never improve by lowering the nominal wage rate
We consider consumers’ utility maximization and firms’ marginal cost pricing behavior in an overlapping generations (OLG) model under perfect competition according to Otaki (2011) and Otaki (2015), and demonstrate the existence of involuntary unemployment without the assumption of wage rigidity
Summary
In this paper we analyze the effects of fiscal policy to realize full-employment under a situation with involuntary unemployment. From these results we can say that in order to realize full-employment from a state with involuntary unemployment we need budget deficit of the government. We analyze the relationship between the indivisibility of the labor supply and the existence of involuntary unemployment under perfect competition with decreasing or constant returns to scale technology using a three-period OLG model with a childhood period as well as younger (working) and older (retired) periods. 2) We show the existence of involuntary unemployment without assuming rigidity of nominal or real wage rate, and based on the results we examine the features of fiscal policy to realize full-employment. A study of the problem of involuntary unemployment and fiscal policy in such a situation is the theme of future research
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