Are Nominal Wages Downwardly Rigid? New Australian Evidence on an Old Quarrel

Paul Flatau ()
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Paul Flatau: Murdoch University

Australian Journal of Labour Economics (AJLE), 2003, vol. 6, issue 1, 1-4

Abstract: Wage rigidity and its effects on macroeconomic performance has been a central topic of macroeconomic debate ever since the publication, in 1936, of Keynes’s The General Theory of Employment, Interest and Money. In the General Theory, Keynes summed up ‘classical’ theory as suggesting that nominal wage flexibility was the foundation stone of a self-adjusting and well-working economic system and that nominal wage rigidity was the source of maladjustment in the macroeconomy (Keynes, [1936] 1973, p. 257). In Keynes’s system, however, employment is determined by the level of aggregate demand and nominal wage cuts only have force to the extent that they may (but are certainly not guaranteed to) increase effective demand by boosting expected consumption and expected investment. Hence, downward nominal wage rigidity, while a possible contributory factor in maintaining unemployment as an equilibrium condition, is by no means the cause of such a condition.

Date: 2003
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