Long-run impact of increased wage pressure

An unanticipated permanent increase in wage pressure is analyzed in a dynam ic general-equilibrium model combining standard theory of capital accumulat ion and monopolistic wage setting. The long-run (steady-state) implications are identical percentage reduction in employment, consumption, and capital stock whereas wages and the real interest rate are unchanged. The reductio n in employment on impact is larger than the steady-state reduction whereas wages rise and the real interest rate declines on impact.