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
Economies and diseconomies of scale are of two types- external andinternal. Internal economies and diseconomies are those which a firm reaps as a result of its own expansion. Conve

manual problems solution of demand theory

Define the simple statistical concepts of average Simple statistical concepts of average (mean) and standard deviation are used.  Estimating a relationship among variables need

The Microeconomic objectives of government These are the policies which are concerned with the allocation and distribution of resources to maximize social welfare. 1. Allo

Special Drawing Rights (SDR) These are international reserve currencies created by the International Monetary Fund  (IMF) to overcome the problems of using gold and national c

what is the importance of demand forecasting to managers

A cost-push inflation have as a result of workers' attempts to push up their wages. Thus, inflation does not have to be monetary phenomenon." Is this statement true, false, or unce


Real and nominal wages Wages are wanted only for what they will buy, real wages being wages in terms of the goods and services that can be bought with them.  Nominal wages

Problem: (a) (i) Assuming that a household uses a subjective discount rate of 10%, calculate the amount that she must spend on consumption per annum during her years of existe