Underemployment and Feedback Effects in an Overlapping Generations Model

This paper considers an economy with imperfect competition on the product markets. It studies the link between underemployment at all wages and feedback effects due to firms' activities. Since the economy is composed of local markets, we are able to endogenise the size of feedback effects. We then show that the price elasticity of the demand for good is a decreasing function of this size. These effects therefore influence firms' marginal revenues and also the condition of existence for underemployment. Despite the Keynesian results obtained in several static models, we strengthen a previous result demonstrated in an overlapping generations model with given price expectations: underemployment at all wages may only exist when the economy contains a single product market, i.e. when firms integrate all feedback effects in their programs. Thus, even when underemployment at all wages is due to excesssive firms' market-powers, feedback effects may not be considered as a major explanation of the former while they are positively correlated with the latter.