Keynesian and new-keynesian theories of unemployment, Managerial Economics

KEYNESIAN AND NEW-KEYNESIAN THEORIES OF UNEMPLOYMENT AND THE BEHAVIOUR OF REAL WAGES  

As  mentioned  above, two  phenomena  about the  labour market  need  to  be explained: the persistence  if unemployment and  the moderately pro-cyclical behaviour  of  real wages. When  aggregate demand increases, labour markets respond typically by  a larger increase  in  employment and a relatively smaller increase in real wages, i.e.,  quantities respond more than prices. But real wages do respond cyclically,  however moderately. 

This point helps us to understand the difference between Keynesian and New- Keynesian  theories of  unemployment.  Though  both  kinds  of  theories help explain persistent unemployment, it is only some of the new-Keynesian theories that explain why wages behave pro-cyclically, though only moderately so. The Keynesian theory clearly  implies that  wages behave counter-cyclically. This follows from  the assumption of a  constant nominal wage. Given the nominal wage  rate W,  the real wage W/P  falls during an expansion as the price level P gradually increases. It  is this fall in  the real wage that induces firms to employ more  labour and produce higher output as  aggregate demand increases. During contraction, on the  other  hand, real wages  rise as prices fall, nominal wages remaining unchanged.  The Keynesian model  thus implies  a counter-cyclical behaviour  of  real wages.  This is  not  in  accordance with  the  empirically observed behaviour of real wages. In real world we  see that real wage increases during periods of boom and decreases during  recession. The new-Keynesian models imply an advance over the Keynesian model to the extent  that  they  imply a pro-cyclical behaviour  for  real wages,  in  accordance with empirical observations.  

Posted Date: 10/26/2012 6:46:45 AM | Location : United States







Related Discussions:- Keynesian and new-keynesian theories of unemployment, Assignment Help, Ask Question on Keynesian and new-keynesian theories of unemployment, Get Answer, Expert's Help, Keynesian and new-keynesian theories of unemployment Discussions

Write discussion on Keynesian and new-keynesian theories of unemployment
Your posts are moderated
Related Questions
Real Rigidities in the Labour Market   New Keynesian  theories of the labour market help in explaining  the existence of involuntary unemployment. The theories also attempt to

Controller of Credit The principles of credit control by the central bank were discovered and enunciated after the publication of Bagehot Lombard street in 1873. Even after 187

Types of Price Elasticity of demand   a)     Perfectly inelastic demand Demand is said to be perfectly inelastic if changes in price have no the quantity demanded so

Assume that input prices are constant at r = 1, w = 1, with technology which consists of 5 processes having the following properties: Process Inputs Capital (machine hours)

(Kinky Demand Curve) Short Period Kinked demand curve was first used by Prof. Paul M. Sweezy to elucidate price rigidity under oligopoly. In an oligopoly market, firm knows that


DETERMINANTS OF MONEY SUPPLY The total supply of nominal money in the economy is determined by the joint behaviour of the central bank which controls the total issue of the hig

what are the limitation of managerial economics and what is the solution of it?

No new substitutes for the commodity If some new substitutes for a commodity appear in the market, its demand normally declines. This is quite natural, since with the availabil

Effectiveness of Trade Unions in Developing Countries Trade Unions in developing countries tend to be less effective in their wage negotiations with employers than their count