Broadening The Theory Of Aggregate Supply: A "New Critical" Proposal

David Laibman ()
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David Laibman: Program in Economics, Graduate School, City University of New York

Eastern Economic Journal, 2006, vol. 32, issue 2, pages 241-257

Abstract: In a proposed "New Critical" dual to the standard New Classical view of the labor market, the money wage rate is given, but the real supply of labor is sensitive to the real wage (the "Dobb Effect"). Expansionary policy raises the price level, lowering the real wage rate and forcing workers to supply more labor. The long-run aggregate supply curve is horizontal. A preliminary synthesis of the New Classical and New Critical models produces a positive multiplier. This broader view of the labor market suggests that neither the "policy ineffectiveness" extreme nor the "fine tuning" extreme constitutes an adequate basis for macroeconomic policy.

Date: 2006
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