DP670 The High Unemployment Trap

Author(s): Gilles Saint-Paul
Publication Date: July 1992
Keyword(s): Flexibility, Labour Market, Labour Mobility, Unemployment
JEL(s): D21, E23, E24, J22, J23, J63, J64
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=670

A model of the labour market under firing restrictions and endogenous quits is constructed. It is shown that in the spirit of Blanchard and Summers (1988), the model can generate multiple equilibria, with a low-quits/high-unemployment equilibrium coexisting with a high-quits/low-unemployment equilibrium. Under weak conditions, low-unemployment equilibria Pareto dominate high-unemployment equilibria. Mobility premia improve aggregate welfare but may increase unemployment.