The Political Economy of Wages and Unemployment

The Political Economy of Wages and Unemployment

A Neoclassical Exploration

William Oliver Coleman

In this tightly argued work William Coleman explores the macroeconomic implications of politically based restraints on competition in labour markets.

Chapter 1: The Problem Labour Monopoly Might Solve

William Oliver Coleman

Subjects: economics and finance, labour economics

Extract

A PROBLEM AND A POTENTIAL SOLUTION The abiding theoretical problem of macroeconomics asks, ‘Why is there unemployment?’ The Classical economists sought to answer this question by invoking a resistance in real wages to the reduction necessary to eliminate unemployment; ‘real wage rigidity’. But why real wages should be rigid was not answered. And why unemployment was intermittently pliant to something entirely non-real – monetary policy – could not be answered within their tenets. Keynesian economics, by contrast, answered the question of unemployment by invoking nominal wage rigidity. As explicated by means of the IS-LM model, Keynesian doctrine held that rigidity in the money wage would explain both the existence of unemployment, and its apparent sensitivity to monetary policy.1 This last sensitivity was important because it suggested a remedy for unemployment – monetary and fiscal policy – that was more politic than socially unpopular wage cuts. And perhaps this was enough for the Keynesian account of unemployment to displace the Classical one. The Keynesian account, however, met an increasing dissatisfaction with the passing of the post-war decades. It was difficult to reconcile wage rigidity (especially nominal rigidity) with labour market participants that are both rivalrous and rational. And without wage rigidity, how could socially costly, ‘involuntary’ unemployment exist? It increasingly appeared to theorists that there was an inconsistency in the conjunction of involuntary unemployment, optimization and labour market competition. Thus in the post-war debates over Keynesian economics there loomed ever larger an apparent imperative to make a choice between the elements of a seemingly...

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