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The Purchasing Power Argument – Could Rising Wages Foster Employment?

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  • Ulrich van Suntum
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    Abstract

    The so-called purchasing power argument of wages (PPA), suggesting that rising wages could increase employment instead of reducing it, is examined within a general theoretical framework. While the demand side is modelled by means of a path-dependent Keynesian model with a Kaldorian saving function, a neoclassical production function is assumed on the supply side. It is shown that there is a core of truth in the PPA, if real wages are lower than marginal productivity of labour. While a temporary demand shock could indeed be overcome by rising wages, it is not possible, however, to outweigh a permanent slump in total demand by that way. Moreover, in contrast to conventional fiscal policy, wage rises according to the PPA imply both a rising price level and the danger of neoclassical unemployment. In an open economy, the relevance of the PPA is generally further reduced.

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    Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200126.

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    Handle: RePEc:muc:wpaper:200126

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    1. Kalecki, Michal, 1971. "Class Struggle and the Distribution of National Income," Kyklos, Wiley Blackwell, vol. 24(1), pages 1-9.
    2. J¸rgen Jerger & Jochen Michaelis, 2003. "Wage Hikes as Supply and Demand Shock," Metroeconomica, Wiley Blackwell, vol. 54(4), pages 434-457, November.
    3. Pagano, Marco, 1990. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," Economic Journal, Royal Economic Society, vol. 100(401), pages 440-63, June.
    4. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, Octomber.
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