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Is Labour Market Flexibility Desirable Or Harmful? A Further Dynamic Perspective

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  • Luciano Fanti
  • Piero Manfredi

Abstract

A common belief of mainstream economics as well as underpinning government policy is that the more flexible real wage is, the lower is unemployment. In this paper we study the dynamics of a standard neoclassical labour market under the simplest Walrasian adjustment rule. We show that when consumption and leisure are sufficiently low substitutes, an increase in real wage flexibility may destabilize the unique Walrasian equilibrium of the economy, triggering fluctuations in wages and employment. Minimal departures from strict (Walrasian) neoclassical equilibrium modelling are required to obtain instability results for wage flexibility.

Suggested Citation

  • Luciano Fanti & Piero Manfredi, 2010. "Is Labour Market Flexibility Desirable Or Harmful? A Further Dynamic Perspective," Metroeconomica, Wiley Blackwell, vol. 61(2), pages 257-266, May.
    • Handle: RePEc:bla:metroe:v:61:y:2010:i:2:p:257-266
    DOI: 10.1111/j.1467-999X.2009.04058.x
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    References listed on IDEAS

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    Cited by:

    1. Amitava Krishna Dutt & Sébastien Charles & Dany Lang, 2015. "Employment Flexibility, Dual Labour Markets, Growth, and Distribution," Metroeconomica, Wiley Blackwell, vol. 66(4), pages 771-807, November.
    2. Roa, María José & Saura, Dulce & Vázquez, Francisco J., 2011. "Economic growth, labor market and demographic patterns," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 81-91, February.
    3. Luciano Fanti, 2012. "Prices, productivity and irregular cycles in a walrasian labour market," Discussion Papers 2012/152, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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