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<p>This paper explores market distortions in a monopolistic competition framework with multiple heterogeneous sectors and endogenous labor supply. We show that the aggregate labor supply in the market equilibrium is lower than its socially optimal level. We also find that, if the labor elasticity is relatively high, then all the sectors in the economy are underemployed in the market equilibrium compared to the social optimum. For sufficiently low values of the labor elasticity, some sectors with a relatively high elasticity of substitution between varieties appear to be overemployed, while the other sectors are underemployed. We then provide a quantitative illustration for the welfare losses caused by the inefficient labor supply and find that these losses can be substantial.</p>

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Distortions in monopolistic competition with endogenous labor

  • 期刊论文

  • 发表日期：

    2025年8月30日

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  • Daria Pankova,
  • Alexander Tarasov

摘要

This paper explores market distortions in a monopolistic competition framework with multiple heterogeneous sectors and endogenous labor supply. We show that the aggregate labor supply in the market equilibrium is lower than its socially optimal level. We also find that, if the labor elasticity is relatively high, then all the sectors in the economy are underemployed in the market equilibrium compared to the social optimum. For sufficiently low values of the labor elasticity, some sectors with a relatively high elasticity of substitution between varieties appear to be overemployed, while the other sectors are underemployed. We then provide a quantitative illustration for the welfare losses caused by the inefficient labor supply and find that these losses can be substantial.