Research program : Unemployment and Wage Bargaining in quantity rationing models

Quantity Rationing Models were at their peak in the seventies, when they achieve to put in a single framework both Classical and Keynesian macroeconomics.
They were thereafter heavily criticized because most of them assumed fixed prices.

In the eighties, several researchers at CORE (among which Jean-Paul Lambert and Henri Sneessens [homepage]) developed a framework aggregating micro markets in disequilibrium. In this set-up, quantity constraints flow from technical rigidities (putty-clay production) and segmentation of micro-markets preventing the optimal allocation of productive capacities. This theory was in line with business surveys which suggest that both capital and labor are underutilized in equilibrium.

This approach culminated in the European Unemployment Programme [book] led a.o. by Jacques Drèze [homepage], in which the same methodology was used in a series of European countries to identify the sources of unemployment.

Following Drèze, Lambert and Sneessens, persons having further investigated the theoretical implications of this aggregation of micro markets in disequilibrium include Christian Arnsperger, Jacques Bughin, Jean-Bernard Chatelain, Horst Entorf, Jean-François Fagnart, Omar Licandro, Philippe Monfort, Franck Portier, and myself.

Only them (and a few others) could nowadays remember the beauty of the aggregation over micro markets formula:

Lambert's CES

In Bargaining and equilibrium unemployment: Narrowing the gap between New Keynesian and ‘disequilibrium’ theories we show that equilibrium unemployment results from the complementary interaction of agents' market power and of quantity constraints.

This approach was extended to a multi-sectoral setting, giving a role for sectoral demand shocks in explaining unemployment. Main paper: Externalities in Wage Formation and Structural Unemployment.

Inter-temporal behaviors and dynamics are introduced in the next step, in the paper Underemployment of production factors in a forward-looking model. The objective is to shed light on the joint dynamics of unemployment rate and degree of utilization of capacities.

Underutilization of capital and labor


In the following two papers, we show how quantity constraints can be analyzed in dynamic general equilibrium models, one with imperfect competitition (unions) and one with perfect competitions on all markets.

On the right, we illustrate that when mismatch between labor supply and labor demand increases (rho decreases), capital accumulation is slowed down, and poverty traps are more likely.

Rise in the mismatch parameter