‘Not Even Wrong’
Chapter 11: Are estimates of labour demand functions mere statistical artefacts?
‘Not Even Wrong’
One of the most enduring controversies in macroeconomics is the question as to whether or not unemployment can be largely attributed to the real wage being too high. The question has been interpreted as essentially an empirical issue. The neoclassical approach suggests that, in the long run, capital–labour substitution and wage flexibility guarantee full employment, and, hence, using the neoclassical production function one can derive estimates of the elasticity of employment with respect to the real wage. Indeed, the motivation for Paul Douglas originally to begin his seminal estimations of the aggregate production function was the spectacle of lecturers in the 1920s drawing labour demand schedules on the blackboard without any idea of the steepness of their (downward) slopes (Douglas, 1948). Since the mid- 1960s, there have been numerous studies that have attempted to resolve this issue by drawing on neoclassical production theory and explicitly, or implicitly, estimating the elasticity of the demand for labour with respect to the real wage.
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