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Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

  • Mario Amendola
  • Jean-Luc Gaffard
  • Francesco Saraceno

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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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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  1. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-41, March.
  2. Francesco Saraceno, 2004. "Wage Regimes, Accumulation and Finance Constraints : Keynesian Unemployment Revisited," Sciences Po publications 2004-01, Sciences Po.
  3. Dreze, Jacques H., 1997. "Walras--Keynes equilibria coordination and macroeconomics," European Economic Review, Elsevier, vol. 41(9), pages 1735-1762, December.
  4. 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.
  5. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247.
  6. d'ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, . "On monopolistic competition and involuntary unemployment," CORE Discussion Papers RP -909, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. 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.
  8. Hicks, J R, 1970. "A Neo-Austrian Growth Theory," Economic Journal, Royal Economic Society, vol. 80(318), pages 257-81, June.
  9. Amendola, Mario & Gaffard, Jean-Luc, 1998. "Out of Equilibrium," OUP Catalogue, Oxford University Press, number 9780198293804.
  10. 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.
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