By Hans. Jørgen Jacobsen and Christian Schultz
 

We study the consequences of imperfect competition in a macro model with only one imperfection; that of labor market competition. Otherwise the model is 'clean'; agents are optimizers, prices are endogenous, and expectations are rational. We show that, although imperfect competition in itself can  explain unemployment (as is well known), it does not in itself give  strong support to the use of traditional fiscal policy in fighting unemployment. Fiscal policy will (almost inevitably) have real effects but only through a special effect that may be difficult to control. In many  cases fiscal policy cannot create full employment, and it may very well have perverse effects.