Economic Growth and the High Wage Economy

12 Why high wages don't cause unemployment

Introduction

A common denominator running through the spectrum of modern macroeconomic theory, be it the new classical or old and new Keynesian, is that unemployment can be reduced only if real wages are cut and that relatively high rates of unemployment are a function of relatively high real wage rates. The key philosophical distinction between the new classical and contemporary Keynesian economics is that for the new classicals unemployment is voluntary whereas for the new Keynesians it is largely involuntary.¹ The new-Keynesian theorists, basing themselves on Keynes’ own foundation contribution to the literature, argue that real wages must be cut in the short run (plant size and technology are held ...