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Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

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  • Mario Amendola
  • Jean-Luc Gaffard
  • Francesco Saraceno

Abstract

Keynes' main concern in the "General Theory" is about the capacity of an economy to return to full employment equilibrium when subject to a (negative) demand shock. He maintains that money wages cuts may not help reabsorb unemployment, as they do not necessarily imply a fall in real wages. On the contrary, wage rigidity may be necessary for avoiding that a cumulative process propels the economy far away the full employment equilibrium. Co-ordination failures in the investment-saving market are behind this conclusion. However, the analysis is carried out within a static equilibrium framework. This paper is an attempt to focus on the problems of intertemporal co-ordination arising within the context of a sequential economy. Our analysis of the out-of-equilibrium process of adjustment stirred by a shock allows to generalize the original Keynesian intuition. Unemployment emerges as the result of a lack of co-ordination due to irreversibly constrained choices, and not only nominal but also real wage flexibility does not necessarily help to restore equilibrium. As a matter of fact, it may even be harmful, by triggering processes that make the economy diverge from equilibrium. Our analysis has important analytical implications as regards the role of market imperfections and the interpretation of the effects of monetary policy. Copyright (c) Scottish Economic Society 2004.

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Bibliographic Info

Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 51 (2004)
Issue (Month): 5 (November)
Pages: 654-674

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Handle: RePEc:bla:scotjp:v:51:y:2004:i:5:p:654-674

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References

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  1. d’ASPREMONT, C. & DOS SANTOS FERREIRA, R. & GERARD-VARET, L.-A., 1986. "On monopolistic competition and involuntary unemployment," CORE Discussion Papers 1986035, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Francesco Saraceno, 2004. "Wage Regimes, Accumulation and Finance Constraints: Keynesian Unemployment Revisited," Documents de Travail de l'OFCE 2004-01, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Hicks, J R, 1970. "A Neo-Austrian Growth Theory," Economic Journal, Royal Economic Society, vol. 80(318), pages 257-81, June.
  4. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  5. James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
  6. Amendola, Mario & Gaffard, Jean-Luc, 1998. "Out of Equilibrium," OUP Catalogue, Oxford University Press, number 9780198293804, September.
  7. DREZE, Jacques H., 1997. "Walras-Keynes equilibria coordination and macroeconomics," CORE Discussion Papers 1997051, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  9. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-41, March.
  10. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247, September.
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Cited by:
  1. Eloi Laurent & Jean-Paul Fitoussi, 2009. "Macroeconomic and social policies in the EU 15: the last two decades," Sciences Po publications 2009-21, Sciences Po.
  2. Francesco Saraceno, 2004. "Wage Regimes, Accumulation and Finance Constraints : Keynesian Unemployment Revisited," Sciences Po publications 2004-01, Sciences Po.
  3. Jean Luc Gaffard, 2013. "La macroeconomie à l'épreuve des faits," Documents de Travail de l'OFCE 2013-14, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sqhi4gm is not listed on IDEAS
  5. Eloi Laurent & Jean-Paul Fitoussi, 2008. "North by Northwest : What's Wrong with the French Model and How Can the Nordic Model Help ?," Sciences Po publications 2008-18, Sciences Po.
  6. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09l8sci08kj is not listed on IDEAS
  7. Jean-Luc Gaffard & Francesco Saraceno, 2007. "International Trade and Domestic Distortions: Modelling the Transition Process," Documents de Travail de l'OFCE 2007-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  8. Mauro Napoletano & Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2012. "Wage Formation, Investment Behavior and Growth Regimes: An Agent-Based Analysis," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 235-261.
  9. Mario Amendola & Jean-Luc Gaffard, 2010. "Unemployment as a Disequilibrium Phenomenon: the economics of Keynes and how to go ahead from Patinkin, Leijonhufvud and Hicks," Sciences Po publications 2010-24, Sciences Po.
  10. repec:spo:wpecon:info:hdl:2441/1261 is not listed on IDEAS
  11. Jean-Luc Gaffard, 2008. "Innovation, competition, and growth: Schumpeterian ideas within a Hicksian framework," Journal of Evolutionary Economics, Springer, vol. 18(3), pages 295-311, August.
  12. Jean-Luc Gaffard & Francesco Saraceno, 2012. "International trade and domestic distortions," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 275-301, April.

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