A Neoclassical Exploration
Chapter 10: Rigidity and Volatility in the Face of the Cycle: A Neoklassikal Analysis
10. Rigidity and volatility in the face of the cycle: a neoklassikal1 analysis This chapter seeks to give the labour monopoly theory a greater resonance with common appearances by relaxing a certain assumption that has so far been maintained throughout: that the marginal productivity of labour diminishes. This assumption has been key; it is the diminishing marginal productivity of labour that yields the labour demand curve that the labour monopoly exploits. This assumption is also near universal. But its relaxation is, nevertheless, warranted. Considerations of ‘realism’ suggest that we do not exist in a twice-differentiable world, but one dominated by linearity (constant marginal cost) and zero substitutability (fixed coefficients). Still more importantly, the twice-differentiable aggregate production function sits awkwardly with the observed behaviour of labour demand. For the twice-differentiable aggregate production function makes the labour demand schedule solely a matter of technical knowledge and the size of capital stock; both of which might be thought to change slowly, more slowly than the sudden movements in labour demand observed during the business cycle. To put the point another way: the very real wage rigidity that will predict unemployment under the twice-differentiable production function will also predict a degree of ‘employment rigidity’ that is not commonly observed. Must the labour monopoly account of unemployment be hostage to such a doubtful model of labour demand? This chapter therefore investigates whether the labour monopoly account of unemployment can extend to an economy where a marginal productivity theory of wages does hold on account of...
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