We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect...

This paper provides a novel microeconomic foundation for pecuniary human capital externalities in a labor market model of monopsonistic competition. Multiple equilibria arise because of a strategic complementarity in investment decisions.