Abstract
Theories of business cycles centered upon labor market variables have considered four topics:
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i)
the full employment constraint, setting a ceiling to the process of growth;
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ii)
real wage changes, affecting income distribution and hence the process of accumulation and saving;
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iii)
wage and price changes, affecting the labor supply;
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iv)
wage and price dynamics, creating deflationary or inflationary kinds of instability.
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References
The Phillips curve emerged first as a nonlinear and inverse dependence of the rate of change of nominal wages on the rate of unemployment and was rationalized by relating unemployment to the excess supply of labor. See Phillips(1958) and Lipsey(1960).
The Phillips curve methodology shares both these aspects. On the one hand, it refers to reduced forms. On the other, it deals either with short- or long-run aspects, neglecting the medium-run perspective. ‘Loops’, which are obtained by introducing rates of change in the variables, are an attempt at considering dynamic aspects. . On the other hand, these aspects are explicitly considered by those theories, based on hysteresis, which try to contrast the natural rate hypothesis. The new approach claims that “the states of rest of economic systems are characterized by unemployment equilibria which, if they exist, depend on the history of the shocks to actual employment.” (See Cross-Hutchinson, 1988, p. 3) In this perspective, “hysteresis effects on unemployment are those which come after the removal or reversal of the impulses which initially give rise to a change in unemployment: the implication is that once the impulses disappear unemployment will tend to persist in the form acquired during the operation of the impulses.” (ibid.)
The expression is used by Phelps (1987). See also Phelps (1985).
This debate overlaps with Keynes’s discussion of the role of wage flexibility. See Hahn (1987) and Flemming (1987). The latter concludes: “A policy designed to increase wage flexibility,...which one might expect to be “a good thing,” can only be relied upon to raise welfare if other policies, notably monetary policy, are also optimized.” (p. 173)
For instance, in the U. K. monetary wages decreased by 5% between 1900 and 1904 and increased by the same percentage from 1904 to 1913. These averages must be interpreted with care, however; a careful examination of the data reveals that only some sectors followed this pattern.
Some French economists refer to “Regulation” (see Boyer, 1985) to indicate the working of a complex homeostatic mechanism. For a discussion of these concepts, see also Piore (1987)
For a discussion on these points, see Brunetta-Dell’Aringa(1989).
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© 1989 Springer-Verlag Berlin Heidelberg
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Ferri, P., Greenberg, E. (1989). The Labor Market, Business Cycles, and Economic Instability. In: The Labor Market and Business Cycle Theories. Lecture Notes in Economics and Mathematical Systems, vol 325. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-00831-7_2
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DOI: https://doi.org/10.1007/978-3-662-00831-7_2
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