The Classical Labor Market and the Fallacy of Composition

By -
In an economy with full employment, if I am asking too high a nominal wage for my labor, I can reduce that request and find work. That truth is behind the classical labor-market model.

That the above is true does not mean that all workers can reduce their real wage requests and find work. First of all, workers cannot directly negotiate real wages. They can only lower their nominal wage requests. And if all workers do so, this will surely lower nominal aggregate demand. Which, in turn, can lower real output, so that the new nominal wage level is still "too high," and unemployment persists.

Comments

  1. rob9:22 PM

    "They can only lower their nominal wage requests. And if all workers do so, this will surely lower nominal aggregate demand"

    It might lower aggregate demand but surely this is not certain because

    1. Depending upon the elasticity of demand for labor then it might actually lead to sufficiently more workers being hired that a net increase in aggregate demand occurs

    2. If lowering wages increases profit margins then more employers may be attracted to buy more labor. (I'm not sure if this is just #1 stated differently ?)

    ReplyDelete

Post a Comment

Popular posts from this blog

Libertarians, My Libertarians!

By -
Cruel to be kind means that I love you . Because, while I think you are mistaken, your hearts are in the right place -- yes, even you, Silas --  unlike some people . This Breitbart fellow (discussed in the link above), by all appearances, deliberately doctored a video of Shirley Sherrod to make her remarks appear virulently racist, when they had, in fact, the opposite import. I heard that at a recent Austrian conference, some folks were talking about "Callahan's conservative turn." While that description is not entirely inaccurate, I must say that a lot of these people who today call themselves conservative give me the heebie-jeebies.
Read more

"Pre-Galilean" Foolishness

By -
 I am currently reading The Master and His Emissary , which appears to be an excellent book. ("Appears" because I don't know the neuroscience literature well enough to say for sure, yet.) But then on page 186 I find: "Asking cognition, however, to give a perspective on the relationship between cognition and affect is like asking astronomer in the pre-Galilean geocentric world, whether, in his opinion, the sun moves round the earth of the earth around the sun. To ask a question alone would be enough to label one as mad." OK, this is garbage. First of all, it should be pre-Copernican, not pre-Galilean. But much worse is that people have seriously been considering heliocentrism for many centuries before Copernicus. Aristarchus had proposed a heliocentric model in the 4th-century BC. It had generally been considered wrong, but not "mad." (And wrong for scientific reasons: Why, for instance, did we not observe stellar parallax?) And when Copernicus propose
Read more