o He claimed his theory to be ‘general’, i.e., applicable at any point of time. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage ï¬exibility. Keynesâ main concern in the General Theory is about the capacity of an economy to return to a full employment equilibrium when sub-ject to a (negative) demand shock. Keynes provided some explanations: 1) savings and investments are not always equal; 2) producers may lower output instead of prices to reduce inventories; 3) Lower production may increase unemployment rate and decrease incomes; 4) monopoly power on the part of producers and labor unions would prevent prices and wages ⦠When the topic arose in Chapter 18 Keynes did not mention that a full analysis needed to be supported by a theory of prices; instead he asserted that "the amount of employment" was "almost the same thing" as the national income. 1 (The results also depend on the exogenous behaviour of the workforce and on the shapes of various functions. The money supply remains constant in wage units and the rate of interest is unaffected. Likewise, AD curve also starts from the origin. According to Keynes, due to money wage rigidity, that is, downward inflexibility of money wages, results in involuntary unemployment of labour. Sticky Wage, Efficiency Wage, and Keynesian Unemployment* C. Simon Fan+ Lingnan University, Hong Kong Abstract This paper provides a model of involuntary unemployment by combining the insights of the sticky wage theory and the efficiency wage theory. Keynes mentions in §V that there is an asymmetry in his system deriving from the stickiness he postulates in wages which makes it easier for them to move upwards than downwards. I revisit the General Theoryâs discussion of the role of wages in employment determination through the lens of the New Keynesian model. Sticky wages and nominal wage rigidity was an important concept in J.M. They argue the problem may be a lack of aggregate demand (AD) in the economy. That is why he christened his epoch-making book: The General Theory of Employment, Interest and Money (1936). He argued that: His [Keynes's] followers understandably decided to skip the problematical dynamic analysis of Chapter 19 and focus on the relatively tractable static IS-LM model.[14]. [1] They are different things but under suitable assumptions they move together. [20] His point (5), which may be considered a technical detail, is that user cost is unlikely to move in exact parallel with wages. Flexibility of wages, interest rate and prices ensures full employment equilibrium in the economy in the long run. “The value of D (Aggregate Demand) at the point of Aggregate Demand function, where it is intersected by the Aggregate Supply function, will be called the effective demand.”. In Keynes’ scheme of things, both consumption and investment cannot be raised enough to employ more work force. Thus, Keynesian theory of employment determination is also the theory of income determination. Schumpeter and Hicks appear to have taken Keynes's comment at face value, concluding from it that the General Theory analysed a time period too short for prices to adapt, which deprives it of any interest. To do so, it first defines what it means by Keynesian growth theory, by focusing on the longrun role of aggregate demand, and briefly reviews short- and long-term changes in the world economy to argue that the relevance of Keynesian growth theory â¦
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