Unemployment and real wages

24 Apr, 2019 at 21:50 | Posted in Economics | 2 Comments


Not exactly the story that Mankiw et consortes tell you. But Heiner Flassbeck did.


  1. Unfortunately, most textbook description of labour market is flawed. The derivation of labour supply curve from the choice between leisure and income is an absolute fantasy. Do people really have a choice, but work? The alternative is starvation and death, not leisure. Can those who profess this fantasy tell that they chose to be an academic economist by weighing returns and cost of alternatives?
    When the mainstream economics treats demand for labour as a negative function of real wage, they forget that real wage is also income and contributes to purchasing power of those who receive it. So for the mainstream, it is always a movement along a given downward sloping labour demand curve – higher the real wage, lower is the employment (higher is the unemployment).
    But higher real wages add to purchasing power and hence cause shift of the demand curve. That is, there are income and substitution effects. What the Heiner graph implies is that income effect dominates substitution effect, perhaps due to higher marginal propensity to consume of workers.
    What is critical is linking wage growth to industry average productivity, so that those firms performing below the industry level productivity are forced out and those performing better earn economic rent and hence encouraged to re-invest. This is the story of a productivity driven dynamic economy that generates shared prosperity.
    But there has been a delinking of productivity growth and wage growth since the triumph of the Reagan-Thatcher doctrine or neoclasscial counter revolution against Keynesianism, resulting in the capture of productivity growth by the capitalist class. The consequences are rising inequality and falling aggregate demand (under-consumption), aggravated by cuts in public social spending and obsession with debt and deficit as well as inflation fears.

    • You are so right and it’s getting worse.

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