Wages, prices, and employment in a Keynesian long run

Stephen A. Marglin
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Stephen A. Marglin: Harvard University, Cambridge, MA, USA

Review of Keynesian Economics, 2017, vol. 5, issue 3, 360-425

Abstract: The central question this paper addresses is the same one I explored in my joint work with Amit Bhaduri 25 years ago: under what circumstances are high wages good for employment? I extend our 1990 argument in three directions. First, instead of mark-up pricing, I model labor and product markets separately. The labor supply to the capitalist sector of the economy is assumed à la Lewis to be unlimited. Consequently the wage cannot be determined endogenously but is fixed by an extended notion of subsistence based on Smith, Ricardo, and Marx. For tractability the product market is assumed to be perfectly competitive. The second innovation is to show how disequilibrium adjustment resolves the overdetermination inherent in the model. There are three equations – aggregate demand, goods supply, and labor supply – but two unknowns – the labor–capital ratio and the real price (the inverse of the real wage). Consequently equilibrium does not even exist until we define the adjustment process. The third innovation is to distinguish capital deepening from capital widening. This is important because, ceteris paribus, wage-led growth is more likely to stimulate the economy the greater the fraction of investment devoted to capital deepening. A final section of the paper shows that US data on employment and inflation since the 1950s are consistent with the theory developed in this paper.

Keywords: flexprice adjustment; fixprice adjustment; conventional wage; unlimited supplies of labor; capital widening; capital deepening; Phillips curve (search for similar items in EconPapers)
JEL-codes: B22 B41 E12 N12 O41 (search for similar items in EconPapers)
Date: 2017
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