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Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

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Abstract

Keynes' main concern in the General Theory is about the capacity of an economy to return to a 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. The consideration of co-ordination failures in the investment-saving market is 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 of whatever nature allows to generalize the original Keynesian intuition. It shows in fact that unemployment emerges as the result of a lack of co-ordination due to irreversibly constrained choices, and that 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. The analysis carried out has important analytical implications as regards the role of market imperfections and the interpretation of the effects of monetary policy.

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Bibliographic Info

Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2001-02.

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Date of creation: 2001
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Publication status: Forthcoming in the Scottish Journal of Political Economy
Handle: RePEc:fce:doctra:0102

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Keywords: co-ordination; unemployment; wage rigidity; Keynesian economics;

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References

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  1. Francesco Saraceno, 2004. "Wage Regimes, Accumulation and Finance Constraints : Keynesian Unemployment Revisited," Sciences Po publications 2004-01, Sciences Po.
  2. Silvestre, J., 1991. "The Market-Power Foundations of Macroeconomic Policy," Papers 374, California Davis - Institute of Governmental Affairs.
  3. Dreze, Jacques H., 1997. "Walras--Keynes equilibria coordination and macroeconomics," European Economic Review, Elsevier, vol. 41(9), pages 1735-1762, December.
  4. James Tobin, 1991. "Price Flexibility and Output Stability: An Old Keynesian View," Cowles Foundation Discussion Papers 994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
  5. 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.
  6. d'Aspremont, Claude & Dos Santos Ferreira, Rodolphe & Gerard-Varet, Louis-Andre, 1990. "On Monopolistic Competition and Involuntary Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 895-919, November.
  7. Hicks, J R, 1970. "A Neo-Austrian Growth Theory," Economic Journal, Royal Economic Society, vol. 80(318), pages 257-81, June.
  8. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247, September.
  9. Amendola, Mario & Gaffard, Jean-Luc, 1998. "Out of Equilibrium," OUP Catalogue, Oxford University Press, number 9780198293804, September.
  10. 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.
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Cited by:
  1. Francesco Saraceno, 2004. "Wage Regimes, Accumulation and Finance Constraints : Keynesian Unemployment Revisited," Sciences Po publications 2004-01, Sciences Po.
  2. 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.
  3. 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).
  4. repec:spo:wpecon:info:hdl:2441/1261 is not listed on IDEAS
  5. Mauro Napoletano & Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2012. "Wage formation investment behavior and growth regimes: an agent-based analysis," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  6. 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.
  7. Jean-Luc Gaffard, 2013. "La macroéconomie à l'épreuve des faits," Sciences Po publications 2013-14, Sciences Po.
  8. Jean-Luc Gaffard & Francesco Saraceno, 2012. "International trade and domestic distortions," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 275-301, April.
  9. Jean-Paul Fitoussi & Eloi Laurent, 2008. "North by Northwest: What’s Wrong with the French Model and How Can the Nordic Model Help," Documents de Travail de l'OFCE 2008-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  10. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sqhi4gm is not listed on IDEAS
  11. Jean-Paul Fitoussi & Eloi Laurent, 2009. "Macroeconomic and social policies in the EU 15 : the last two decades," Documents de Travail de l'OFCE 2009-20, Observatoire Francais des Conjonctures Economiques (OFCE).
  12. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09l8sci08kj is not listed on IDEAS

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