Edited by Robert W. Dimand and Harald Hagemann
Chapter 37: Wages and employment
The wage–employment relationship is one of the central topics in the General Theory. In particular Keynes argues against the classical doctrine that a decrease in money wages is a general remedy for mass unemployment. Keynes completely rejects the orthodox idea of an equilibrating labour market with self-adjusting characteristics based on the assumption that flexibility of money-wages will systematically lead to full employment. Keynes reversed the direction of causation between real wages and employment. Owing to the complex interdependencies, it takes until chapter 19 for Keynes to dispense with his preliminary assumption of a given money-wage and to raise the fundamental problem of the (in)stability of the dynamic system. Elastic price expectations, an increase in the real burden of debt causing more bankruptcies and a negative structural effect of deflation on aggregate effective demand, counteract that a deflationary process of falling money wages will lead to full employment in a dynamic adjustment process.
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