macroeconomics and the wage bargain

[Jim Devine <JNDF%LMUACAD.BITNET@xxxxxxxxxxxxxxxxx>]

Paul Davidson asked me about the exact determination of which point
on Patinkin's labor supply/demand diagram the economy would be at.
Alan Isaac asked about wage determination. They and most others on
PKT should be interested in a book by Wendy Carlin and David
Soskice, MACROECONOMICS AND THE WAGE BARGAIN (Oxford U.P.,  I
believe).  In that book,the representative
labor market is drawn as follows, with the vertical axis being
the real wage and the horizontal axis being employment.

1. The notional labor demand curve is flat up to the capacity
constraint (due to the fact that labor employment and capacity
utilization move together, so there are no diminishing returns).
At the capacity constraint, this curve is very steep, downward.

2. The labor supply curve is vertical or inelastic, because
of the familiar conflict between income and subtitution effects as
wages rise.

3. However, the economy's equilibrium is not determined by
these curves, but by two other curves, the WRW and PRW curves:

a) the wage-determined real wage curve slopes mildly upward,
on the presumption that workers are able to get more  bargaining
power as employment rises (unemployment falls).  Workers do
not bargain over real wages, but they  are able to keep up
with cost of living increases more effectively as unemployment
falls.

b) the price-determined real wage is flat in the case of constant-
mark-up prices: in the simplest case, w/p = the average product of
labor divided by the mark-up.  (if p = m w/APL, then w/p = APL/m.)

c) the "equilibrium" -- in the sense that employers' and workers'
demands are in sync, is where the wage-determined real wage and
the price-determined real wage curves intersect.  This point is to
the left of conventionally-defined full employment, i.e., where the
notional demand for labor and the supply of labor curves
intersect.

d) The actual situation depends  on the location of the sales
constraint -- determined by the demand for goods and services.
It may cut to the left of WRW/PRW equilibrium, in which case
the inflation rate tends to slow.  It may also cut to the right
of the WRW/PRW equilibrium, in which case the inflation rate
tends to rise (accelerate).  The equilibrium in (c) defines
what Tobin calls the "Non-Accerating Inflation Rate of Unemploy-
ment" (NAIRU), which is quite distinct from the "natural rate of
unemployment" (the intersection of notional demand and supply).

e) to represent the effects of wages on effective demand,
the sales constraint can be drawn as upward-sloping (higher real
wages mean higher employment). This line shifts for the usual
reasons (increases in government purchases, etc.)

Carlin and Soskice provide more sophisticated analyses than the
above (and develop the model more completely). I feel that it's
a useful but simple model, one that would improve most intermediate
macroeconomics textbooks.

Comments?

sincerely,

Jim Devine   BITNET: jndf@lmuacad    INTERNET: jdevine@xxxxxxxxxxxxxxx
Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA
310/338-2948 (off); 310/202-6546 (hm); FAX: 310/338-1950