MORE ON UNEMPLOYMENT
301
What macroeconomic policy is appropriate
when employment is determined by
insider–outsider effects? Suppose there is a
supply-side shock—a sudden increase in
the prices of intermediate imported inputs
such as oil or a natural disaster such as a
drought—that adversely affects the marginal
productivity of labour. This shifts the marginal
productivity insider demand curve to the left,
the dashed IDC curve. If the shock occurs after
insider wages have been set, employment
declines at the constant insider wage to point
C. Insiders, whose initial number is
m*
, would
normally negotiate wages on the basis of ...
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