Chapter 4: Why the Floor Will Fluctuate
Chapter 3 developed a conclusion of considerable apparent significance: average wage income is made the largest by keeping labour costs completely rigid in the face of shifts to the demand for labour caused by changes in the capital stock. Thus the stylized fact of wage rate rigidity in could be explained very simply by reference to wage income maximization. Chapter 3’s analysis, however, might be deemed ‘too successful’ in explaining rigidity. For it predicts an adamantine rigidity in the wage even in the face of the most drastic excess supply of labour. Wage rates are absolutely motionless short of full employment. A closer examination of the implications of wage bill maximization for rigidity is therefore warranted. This chapter consequently digs deeper into the reactions of the wage bill maximizing labour monopolist to shifts in the demand for labour, and extends the analysis of that response to shocks to technology, the terms of trade, taxes and the supply of other factors. This chapter concludes that the rigidity found in Chapter 3 need not extend to all shocks to labour demand; under a labour monopoly wage rates need not be rigid in the face of all shocks to labour demand. Indeed, there are shocks in which the labour monopolist finds it optimal to leave employment completely unchanged, and have the wage rate take all the burden of adjustment. It is concluded that the labour monopolist commonly has two distinct strategies to maximize the wage bill: one that fixes the wage, and one...
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