Re: wage determination

["Alan G. Isaac" <AISAAC@xxxxxxxxxxxx>]

On Mon, 28 Feb 1994 13:20:20 -0700 Victoria Chick said:
>              Keynes worked in two units when establishing the point of
>effective demand and its stability: money and the wage unit. He needed to
>work in money units to develop the aggregate supply curve because firms are
>profit-seekers (on his assumptions, maximisers), and yet there was a need for
>something `real' in which to develop demand, esp. the consumption function.
>Since a price deflator was ruled out (he said because of its imprecision, but
>Minsky would say, and I agree with him, that it is important to keep the
>price of consumption-goods and investment-goods separate). What he used was
>the wage unit - today a neglected feature of his analysis, but a very
>important one: by establishing the proof of the stability of the point of
>effective demand in wage units, that proof is independent of the level of
>wages, in exactly the same way as a behavioural equation specified in `real
>terms' (ie deflated by the price level) is independent of prices. Thus if the
>point of eff. d. gives a level of employment short of full emp., no fall in
>wages will, in itself, restore full empl. It follows that a wide range of
>theories of wages is consistent with Keynes's theory, though no theory of
>wages is provided by Keynes himself. Wages can be determined by bargaining,
>adaptive expectations, almost anything you like except market clearing (which
>violates the rejection of the second postulate).

In a completely static sense this is true, but since in Ch.19 Keynes
acknowledges the possibility that wage dynamics generate real effects,
the lack of a theory of nominal wage dynamics is a crucial
shortcoming. As I have argued before, the _GT_ needs a theory of
nominal wage dynamics but does not have one.

>
>I offer as support for this interpretation the otherwise puzzling structure
>of Chapter 19: in a chapter purporting to analyse `changes in money wages'
>Keynes begins that analysis (p. 262) with: `A reduction of money-wages will
>somewhat reduce prices' and then goes on to discuss the effects of changes in
>prices. Why? because changes in wages do not affect the point of effective
>demand (in wage units).

There is an ambiguity in your use of "changes in wages". If you mean
a cet.par. change in the level of the wage, this is true.  If on the
other hand you mean the kind of wage changes considered in Ch.19,
this is false.