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 3: How a Wage Bill Hill Creates a Wage Rate Floor

William Oliver Coleman

Subjects: economics and finance, labour economics


This chapter lays the analytical foundation for the present inquiry into labour monopoly by establishing how far one may travel in explaining wage rigidity and unemployment by means of a ‘maximally simple’ modelling of labour monopoly. This chapter, therefore, outlines a model of the macroeconomy in which the workforce neither uses money, owns capital, saves income or values leisure, but in which it collectively choose the terms of sale of labour in order to maximize its total wage incomes. The chapter’s leading conclusion is that models of wage bill maximization reach a considerable distance in explaining unemployment. For in such models the maximization of wage incomes can be achieved by imposing a rigid ‘floor’ to the real wage rate, and thereby making full employment, in defined circumstances, unattainable. Further, the optimality of a rigid wage floor survives elaborations of the very simplest model to allow, for example, for pockets of labour market competition, the existence of monopolistic and monopsonistic firms, the presence of risk aversion and the payment of efficiency wages. The chapter also brings out that there exist other strategies for the maximization of wages incomes, apart from a downwardly rigid wage floor. It is shown that, in a wide variety of circumstances, both a maximum to hours worked and a regime of overmanning are just as effective as a wage floor in maximizing wage incomes. THE MAXIMALLY SIMPLE MODEL: WAGE BILL MAXIMIZATION We begin by outlining a simple model that will be a point of reference throughout the...

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