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Broadening The Theory Of Aggregate Supply: A "New Critical" Proposal

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  • David Laibman

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    (Program in Economics, Graduate School, City University of New York)

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    Abstract

    In a proposed "New Critical" dual to the standard New Classical view of the labor market, the money wage rate is given, but the real supply of labor is sensitive to the real wage (the "Dobb Effect"). Expansionary policy raises the price level, lowering the real wage rate and forcing workers to supply more labor. The long-run aggregate supply curve is horizontal. A preliminary synthesis of the New Classical and New Critical models produces a positive multiplier. This broader view of the labor market suggests that neither the "policy ineffectiveness" extreme nor the "fine tuning" extreme constitutes an adequate basis for macroeconomic policy.

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    File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume32/V32N2P241_257.pdf
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    Bibliographic Info

    Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

    Volume (Year): 32 (2006)
    Issue (Month): 2 (Spring)
    Pages: 241-257

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    Handle: RePEc:eej:eeconj:v:32:y:2006:i:2:p:241-257

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    1. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November.
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