Unemployment equilibrium in an economy with linked prices
Wage inflexibility has been widely regarded in modern writing as a cause of unemployment. Almost any Keynesian or non-Walrasian equilibrium which involves equilibrium excess supplies also contain some form of wage or price inflexibility. Yet the micro mechanism of wage inflexibility, its causes and form remains somewhat a mystery. In this paper we study the allocation of resources in an economy in which prices of some goods or services are linked to other goods or services. This is not wage “rigidity” in the traditional sense but it is a form of rigidity which is widely observed. Following the recent literature on non-Walrasian equilibrium (see, for example, Dreze (1975), Barro and Grossman (197 l), Grandmont and Laroque (1976), Malinvaud (1977) and many others) one would expect the allocation to be attained via a set of quantity constraints on net trades. We show in this paper, however, that the allocation mechanism in the economy will not require a general set of limitations on excess supplies and excess demands but rather will tend to have the following two properties: