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 8: Unemployment as a Benefit of Unemployment Benefits

William Oliver Coleman

Subjects: economics and finance, labour economics


Until this point it has been assumed that the only incentive to restrict employment lies in the greater wage incomes that a restriction would yield. But restricting employment will also provide a reward in terms of increasing the amount of what economists call ‘leisure’; the various uses of time that are unpaid, but valued all the same. To ignore a valuation that seem powerful in shaping labour market outcomes is untenable. The present chapter investigates what the recognition the value of leisure will signify for the shape of electorally optimal labour market regulation. Unsurprisingly, the analysis concludes that allowing for this second, additional, incentive to restrict employment extends the impact of labour monopoly to circumstances previously beyond its reach. But it also modifies the character of the impact of labour monopoly, and not just its range. Once leisure is allowed to be valuable, the strong wage rigidity results of simple wage bill maximization are diluted. It is no longer the case that the wage rate has a zero elasticity to the capital stock. It is possible the wage rate may be just as sensitive to the capital stock as it would be under a wholly competitive labour market. However, it can be shown that under the most plausible conditions the elasticity of the wage rate to capital is smaller than under competitive labour markets, and employment correspondingly has a greater elasticity. So, to attempt a summary, it might be said that in allowing for the value of leisure the impact...

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