A Simple Model of Keynesian Unemployment

Constructing a general equilibrium model which compactly incorporates the markets for outputs, labor, money, and equities, we examine equilibrium unemployment. While a mechanism of an efficiency wage brings about nominal wage rigidity, unemployment occurring in our model definitely has Keynesian features. For instance, a reduction in wages rather enhances unemployment through a decrease in consumption. In addition, our paper shows a possibility of Pareto improvement through an increase in unemployment benefits.