Wage norms, capital accumulation, and unemployment: a post-Keynesian view

Abstract

wds)The paper presents a Post Keynesian view of unemployment. It argues, firstly, that the effective labour demand need not be downward sloping with respect to real wages and aggregate demand need not be downward sloping with respect to inflation; secondly, that there is a broad case for unemployment hysteresis, understood as endogeneity of the NAIRU, based on social norms in wage bargaining and on the supply-side effects of capital accumulation; and, thirdly that, much as Keynes had argued, capital investment (rather than labour market institutions) is the key variable to explain changes in aggregate unemployment performance across countries and over time. Overall, the paper advocates a Keynesian view of the NAIRU where effective demand determines unemployment in the short run and the deviation of actual unemployment from the NAIRU determines the change in inflation. In the medium term the NAIRU is endogenous and follows actual unemployment. JEL codes: E12, E24, E25This is the place to dwell on the delineations between Keynes' own analysis, mainstream Keynesian economics and Post Keynesian economics. The following analysis reformulates the Post Keynesian analysis of unemployment in a standard setting, but several mainstream Keynesians (Modigliani et al, 1998, Ball, 1994, Solow, 2000 would share substantial parts of this analysis.

Directed Technological Change in a Post-Keynesian Ecological Macromodel

“…In case of a long period recession, unions will over time lower their target wage share expectation, slowing down the growth rate of wages in the long-run. This is consistent with social wage norms where workers (or labor unions) get used to actual wages which can give rise to labor market hysteresis (Skott 2006;Stockhammer 2011). …”

“…Verdoorn's law will arise with learning-by-doing effects in a technology function or if there are increasing returns-to-scale. More generally, post-Keynesian emphasize mechanisms that give rise to path-dependent growth, which next to endogenous technical change, includes endogenous institutional change and hysteresis effects on the labor markets as well (Setterfield 2011;Stockhammer 2011). Ecological post-Keynesian models are fairly new with only a handful of models emerging in the last few years (Hardt and O'Neill 2017) Within these studies, technological change is either modeled as a constant (Victor 2008;Jackson 2009;Naqvi 2015;Berg et al 2015) or as a decreasing function of time using the Verdoorn's law Sawyer 2013, 2016;Dafermos et al 2017).…”

Underinvestment and Unemployment: The Double Hazard in the Euro Area

“…For example, Alexiou and Pitelis (2003) assigned the neutrality assertion to "[t]he neoliberal tradition [that] considers unemployment to be invariable to the capital stock", while Kapadia (2005) argued that the existing literature "ignored any potential direct and permanent relationship between the capital stock and equilibrium unemployment", exactly because it adopts a framework similar to that used by LNJ. Stockhammer (2011) argues that the capitaldeepening effect on unemployment can be interpreted only in a Post-Keynesian framework that "rejects the quest for micro-foundations of macroeconomics." For their part, however, LNJ had already noted that the neutrality outcome is conditional on the constancy of the wage share and warned that "[i]f … the elasticity of substitution is less than one, capital accumulation (with no technical progress) raises the share of labour and reduces unemployment", (emphasis added).…”

Work-sharing for a sustainable economy

“…The fact that effective demand can be at a level below the full-employment equilibrium makes involuntary unemployment possible (Keynes 1936, Rowthorn 1995, Stockhammer 2011. Monetary and fiscal policy can increase employment through stimulating aggregate demand and economic growth (Ball 1999, Ball et al 2013b, Eggertsson and Krugman 2012, Reifschneider et al 2013, Stockhammer and Sturn 2012, Sturn 2014.…”