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 11: Labour Monopoly as the Source of Money Wage Rigidity: A Hypothesis

William Oliver Coleman

Subjects: economics and finance, labour economics


This chapter reinforces Chapter 10 by further exploring the implications of alternative theories of labour demand for labour monopoly and, in doing so, discovering certain Keynesian echoes. But whereas Chapter 10 was, like the entire analysis so far, concerned with real wage rigidity, the present analysis turns to the issue of nominal wage rigidity. The distinction between real wage rigidity and nominal wage rigidity might be drawn as follows: ● ● Under real wage rigidity real wages do not respond to the shocks that shape the market-clearing real wage. Under nominal wage rigidity nominal wages do not respond to the shocks that shape the market-clearing nominal wage. Despite the parallelism in definition there is a key incongruence between the two rigidities: for whereas real wage rigidity can easily be rationalized purely in terms of violation of competition, nominal wage rigidity seems to imply a violation of rationality. For if nominal wages are not responding to nominal shocks, then real wages are responding to nominal shocks, at least insofar as money prices are themselves responding in some measure to nominal shocks. Thus nominal wage rigidity seems to amount to a nonneutrality in real wages with respect to money. And non-neutrality is not obviously rationalizable in terms of rational behaviour. This chapter seeks to offer an explanation of nominal wage rigidity in terms of the rational behaviour of the labour monopolist. It outlines a model in which a ‘labour monopolist’ will have an incentive to impose rationally a rigidity in the nominal wage. But...

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