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Wage-Price Flexibility And Full Employment

 Wage-Price Flexibility and Full Employment

The Classical Outlook

The classical economists assumed that there was always full employment in the financial system. In case of redundancy, a usual slash in remuneration to the full employment level. Their points of view are as follows:

  • In a rival fiscal system when remuneration are slashed, they tend to diminish in cost of manufacture resultant to the lesser prices of commodities.
  • When prices drops, demand for commodities and sales will be moved up.
  • Enhanced sales will require the employment of more labour and finally full employment will be accomplished.
  • The classical outlook depends on the presumption that variations in remuneration are associated straight away and rationally to actual remuneration.
  • Hence when the remuneration rate is diminished the actual remuneration is also diminished to some extent.
  • Resultant, redundancy is diminished and full employment triumphs.
  • However, it is at the parity of demand and supply of labour at a specified remuneration rate that full employment is accomplished.

The Keynesian Outlook

Keynes began his outlooks about the association among remuneration and employment by accepting the classical hypothesis that both the Law of Diminishing Returns and the Theory of Marginal Productivity functioned.

  • As every labourer is paid the remuneration equal to the marginal product and the law of diminishing returns functions in industry actual remuneration must decline for employment to enhance.
  • However this does not mean that redundancy was due to the negative response of labourers to accept remuneration equal to their marginal product.
  • As per Keynes, redundancy consequents from the lack of total demand, it is demand that ascertains employment and employment ascertains the actual remuneration rate and not the other way round.
  • With a view to accomplish this, Keynes brought out the distinction among remuneration and actual remuneration.
  • Keynes pointed out that the association among the two is contrary. When remuneration are diminished actual remuneration rise. This is for the reason that a drop in remuneration tends to a more than a ration drop in price.
  • When prices drops, actual remuneration hikes for the reason that the enhancement in the value of money.
  • A drop in prices will diminish total demand, productivity, earnings and employment.
  • A slash in remuneration will hence diminish prices and depress total aggregate demand and therefore employment.
  • Similar to classicists Keynes assumed that employment varies contrarily with actual remuneration.
  • The volume of work demanded hikes as actual remuneration drops. But Keynes deprived that a slash in remuneration for the fiscal system as a whole would essentially tend to cut in actual remuneration.
  • He assumed that diminish in remuneration would tend to a ration reduce in aggregate expenditure, demand and prices, leaving actual wages whole.
  • To enhance the employment total demand must be raised while holding remuneration considerably invariable.
  • Total demand could be enhanced through monetary and fiscal policy and remuneration could be held reasonably stable under modern collective bargaining practices.
  • Therefore, an enhancement in total demand keeping remuneration invariable will hike productivity costs and therefore the prices. Likewise, actual remuneration will drop.
  • Keynes argued that labourers are ready to work at the present remuneration rate even if their actual remuneration rates are slashed by hike in prices. This is for the reason that the subsistence of money illusion in the labour market.
  • They will allow their actual remuneration to be diminished by price rises devoid of leaving the market. This is actually illustrated in the diagram below.

In the below given diagram, employment is calculated on the horizontal axis and the actual remuneration rate on the vertical axis. DL is the demand for labour curve and SL is the supply of labour curve. The inclination of the labour supply curve is level up to a range and then it inclines upward to the right.

It indicates that in the level section any number of workers upto NF level are willing to work at the existing remuneration rate or wage rate (W) to which they have become familiar. So if their actual remuneration are diminished they will be ready to work under the money illusion that is their remuneration are the same even though the price level has increased.

Therefore, upto the full employment level, NF more labourers can be employed at the same remuneration rate. However beyond NF workers would demand higher remuneration to supply labour. That is why the labour supply curve bends upwards.

In this diagram, at W/P remuneration rate N1 workers are employed when DL and SL curves cut at point A. This is the Keynesian underemployment symmetry. At this wage level, N1 to NF workers stay unwillingly redundant.

When the price level hikes to P1 level the actual remuneration rate is reduced to W/P1 and the labour supply curve shifts downward devoid of the workers noticing it due to money illusion. At this remuneration rate the new symmetry is recognized at Point B where the demand for labour SL1 which workers are willing to provide at the same remuneration rate (W).

Therefore, there is full employment of labour at NF level. The main disparity among the classical and Keynesian propositions about slash in actual remuneration lies in that the classicists campaigned slash in actual remuneration through slash in remuneration.

They assumed in the sophistication in the remuneration. On the other hand, Keynes held that slash in actual wages would come about through the hike in total demand and employment. It is by enhancing total demand and employment first that lower actual remuneration are followed not the other way around.

Moreover, Keynes assumed that remuneration are not sophisticated quite they are sticky downward. This unbending remuneration may be due to a number of institutional and other aspects such as:

  1. Powerful trade unions which are able to prevent remuneration from dropping

  2. Statutory provisions such as minimum wage laws

  3. Unsuccessful ness of employers to diminish remuneration due to a desire to retain loyal and experienced employees and to maintain confidence and

  4. Disinclination of redundant workers to accept diminished remuneration even though they would be willing to work at lesser remuneration brought about by a hike in prices.

  5. Keynes hence discarded a strategy of sophisticated remuneration as not only artificial but also for the reason that it would cause a huge instability of prices so violent possibly as to make business calculations futile in a fiscal society in which we exist.

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