Real Wages and Unemployment: State of the Debate

Abstract

he question of the impact of real wages on employment and unemployment continues to be contentious. A recent example is Bell (2000) in which a number of the essays touch on this question and related policy issues. Unfortunately, many of the essays use questionable arguments to sidestep the question altogether and this approach is consistent with a major strand in the Australian academic literature on unemployment. Therefore, it would be useful to restate the terms of this debate so that the arguments can be embedded in an appropriate framework. The second part of this paper attempts that task.The third section of the paper examines two examples of sustained high unemployment rates that occurred in Australia in the twentieth century. In both cases, the high unemployment rate resulted from an attempt to improve the income distribution by increasing wage rates. An econometric analysis presented in the Appendix examines the role of high real wages in these experiences. In both cases the focus is on how the economy reacted to a real wage shock, that is, a sharp increase in real wages.

Alternative Policy Responses to the Global Financial Crisis

“…So far, little has been said about the impact of wage increases on the slowdown. In the 1930s, a wage reduction occurred in the interests of “sharing the burden.” It would be counterintuitive and counterfactual to argue that real wages do not affect unemployment (see Valentine, 2004). In this environment the government should be urging wage restraint.…”

An Analysis of Joblessness in Australia

“…If theory cannot provide a fm answer on the elasticity of employment, one must rely on the empirical literature. The estimates of employment elasticity vary from -0.15 to -1.0 (Webster, 2003;Lewis and Macdonald, 2002;Dawkins, 2000Dawkins, , 2001Valentine, 2004;and Argy, 2003, p. 91). Few economists believe that there will be no employment gain from appreciable real wage cuts, especially as Australia's minimum wage is high relative to median earnings by OECD standards.…”