Impact of a Land Price Fall When Labor Markets are Incomplete
Update of Incomplete Labor Markets from March 2012
Published April 22, 2013
In this paper, I explore the impact of a fall in land prices in a class of incomplete labor markets models. These models drop the usual equilibrium restriction that households optimally choose their level of labor supply, and instead treat the path of nominal wages as exogenous. I show that in incomplete labor markets models with overlapping generations or credit constraints, a fall in the price of land generates an inefficient decline in employment if the nominal interest rate does not fall sufficiently. The low employment means that, in these kinds of models, interventions like debt-financed increases in government spending are Pareto improving.
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