Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

Mario Amendola, Jean-Luc Gaffard and Francesco Saraceno ()

Scottish Journal of Political Economy, 2004, vol. 51, issue 5, pages 654-674

Abstract: 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.

Date: 2004
View citations in EconPapers

Downloads: (external link)
http://www.blackwell-synergy.com/servlet/useragent ... &year=2004&part=null link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Wage Flexibility and Unemployment: The Keynesian Perspective Revisited (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:scotjp:v:51:y:2004:i:5:p:654-674

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0036-9292

Access Statistics for this article

Scottish Journal of Political Economy is edited by Robert A. Hart, Andrew Hughes-Hallett and Campbell Leith

More articles in Scottish Journal of Political Economy from Scottish Economic Society
Series data maintained by Christopher F. Baum ().