Skip to main content
SpringerLink
Log in

Are Wage Cuts the Answer? Theory and Evidence

  • Chapter
Economics of the Labour Market

Abstract

This paper investigates the possibility of using wage cuts to lower unemployment. The paper first discusses the role of wages in various economic models (neoclassical, models with imperfect competition, efficiency wage models, insider-outsider models). It argues that in many of these models it is not rational for firms to cut wages as it would decrease their profits, while in some models wages are endogenous. It then considers how a government can cut wages in a market economy and argues that it is not feasible for the government to cut wages. The next section discusses the evidence on labour market flexibility and unemployment. The paper concludes with the argument that wage cuts do not lead to a decrease in unemployment.

“When the rich argue that tax cuts for the rich and wage or social benefit cuts for workers are the only way to cure unemployment about which the rich care deeply, every economist’s eyebrows should rise.” (Freeman, 1998, p. 15)

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
eBook
USD 16.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Akerlof, G.A. (1982) “Labor Market Contracts as Partial Gift-Exchange”, Quarterly Journal of Economics, 97, 543–69.

    Article  Google Scholar 

  • Akerlof, G.A. and J. L. Yellen (1986) Efficiency wage models of the labor market, Cambridge University Press, Cambridge.

    Book  Google Scholar 

  • Barro, R.J. and H.I. Grossman (1971) “A General Disequilibrium Model of Income and Employment” American Economic Review; 61 (1), March 1971, 82–93.

    Google Scholar 

  • Bewley, T.F. (1998) “Why not cut pay?”, European Economic Review, 42, 459–490.

    Article  Google Scholar 

  • Calmfors, Lars and John Driffill (1988), “Bargaining Structure, Corporatism, and Macroeconomic Performance”, Economic Policy, 6, 14–61.

    Google Scholar 

  • Card, D. and A. B. Krueger (1995) Myth and Measurement: The New Economics of the Minimum Wage, Princeton University Press, New Jersey.

    Google Scholar 

  • Chapman, B.J., S.J. Dowrick & P.N. Junankar (1991) “Perspectives on Australian Unemployment: The Impact of Wage-setting Institutions” (with), in Australian Economic Policy: Conference Proceedings, (Ed.) F.H. Gruen, Centre for Economic Policy Research, Australian National University, Canberra, (pp. 21–57 ).

    Google Scholar 

  • Daly, A., N.H. Duc, D. Eldridge, O. Gabbitas and P. McCalman (1998) Youth Wages and Employment, Productivity Commission Staff Research Paper, Ausinfo, Canberra.

    Google Scholar 

  • Debelle, G. and J. Vickery (1998) “The Macroeconomics of Unemployment”, in Unemployment and the Australian Labour Market ed. by G. Debelle and J. Borland, Reserve Bank of Australia, Sydney.

    Google Scholar 

  • Freeman, R.B. (1988), ‘Labour Market institutions and economic performance’, Economic Policy, 6, 63–132.

    Article  Google Scholar 

  • Freeman, R.B. (1998) “War of the models: Which labour market institutions for the 21st Century?”, Labour Economics, 5, 1–24.

    Article  Google Scholar 

  • Friedman, M. (1980) ‘Memorandum’, Treasury and Civil Service Committee, House of Commons, UK, Session 1979–80, Memoranda on Monetary Policy, HMSO, London.

    Google Scholar 

  • Gregg, P. and A. Manning (1997) “Labour market regulation and unemployment”, in Unemployment Policy: Government Options for the Labour Market ed. by D.J. Snower and G. de la Dehesa, Centre for Economic Policy Research, Cambridge University Press, Cambridge.

    Google Scholar 

  • Gregory, R.G. (1998) “Solutions to Australian Unemployment”, in Unemployment and the Australian Labour Market ed. by G. Debelle and J. Borland, Reserve Bank of Australia, Sydney

    Google Scholar 

  • Gregory, R.G. and P. Sheehan (1998) “Unemployment trends in Australia and the US: The natural rate, wage flexibility and path dependence”, in Working for the Future, ed. by P. Sheehan and G. Tegart, VUT Press, Melbourne.

    Google Scholar 

  • Junankar, P.N. (1997) “Lessons from Britain’s Thatcherite Experiment”, Economic Papers, 16 (4), 65–70.

    Article  Google Scholar 

  • Junankar, P.N. and C.A. Kapuscinski (1992), The Costs of Unemployment in Australia. EPAC Background Paper No. 25, Australian Government Publishing Service, Canberra.

    Google Scholar 

  • Junankar, P.N., M. Waite & G. Belchamber (1998) “The Youth Labour Market: Anecdotes, Fables and Evidence”, Paper presented to the Joint Workshop on “Do youth wages matter?” at the Centre for Economic Policy Research, ANU and Productivity Commission, 23rd November 1998.

    Google Scholar 

  • Kalecki, M. (1943) “Political Aspects of Full Employment”, Political Quarterly, 14, 322–331.

    Article  Google Scholar 

  • Keynes, J.M. (1936) The General Theory of Employment, Interest and Money, Cambridge University Press, Cambridge.

    Google Scholar 

  • Layard, R., S. Nickell and R. Jackman (1991) Unemployment: Macroeconomic Performance and the Labour Market, Oxford: Oxford University Press.

    Google Scholar 

  • Lindbeck, A. (1993) Unemployment and Macroeconomics, London: MIT Press.

    Google Scholar 

  • Lucas, R.E., Jr and L.A. Rapping (1969) “Real Wages, Employment, and Inflation” Journal of Political Economy; 77 (5), 721–54.

    Article  Google Scholar 

  • Malinvaud, E. (1982) “Wages and Unemployment”, Economic Journal, 92, 1–12.

    Article  Google Scholar 

  • Mortensen, D.T. (1970) “Job Search, the Duration of Unemployment, and the Phillips Curve”, American Economic Review; 60(5), 847–62.

    Google Scholar 

  • Nickell, S. (1997) “Unemployment and Labor Market Rigidities: Europe versus North America”, Journal of Economic Perspectives; 11 (3), 55–74.

    Article  Google Scholar 

  • OECD (1997) Employment Outlook, OECD, Paris.

    Google Scholar 

  • OECD (1998) Employment Outlook, OECD, Paris.

    Google Scholar 

  • Phelps, E.S. (1970) Microeconomic Foundations of Employment & Inflation Theory ( New York: N.W. Norton & Co. Inc.).

    Google Scholar 

  • Rowthorn, R.E. (1977) “Conflict, Inflation and Money” Cambridge Journal of Economics; 1 (3), 215–39.

    Google Scholar 

  • Rowthorn, R.E. (1992) “Centralisation, Employment and Wage Dispersion”, Economic Journal, 102, 506–523.

    Article  Google Scholar 

  • Schmid. G. (1995) “A New Approach to Labour Market Policy A contribution to the Current Policy Debate on Efficient Employment Policies”, Economic and Industrial Democracy, SAGE, London, 16, 429–456.

    Article  Google Scholar 

  • Shapiro, C. and J.E. Stiglitz (1984) “Equilibrium Unemployment as a Worker Discipline Device” American Economic Review; 74 (3), 433–44.

    Google Scholar 

  • Solow, R. (1990) The Labour Market as a Social Institution, Oxford: Blackwell.

    Google Scholar 

  • Walras, (1874, 1954) Elements of Pure Economics, translated by William Jaffe, Allen and Unwin, London.

    Google Scholar 

Download references

Authors
  1. P. N. Junankar
    View author publications

    You can also search for this author in PubMed Google Scholar

Copyright information

© 2000 Cambridge University Press

About this chapter

Cite this chapter

Junankar, P.N. (2000). Are Wage Cuts the Answer? Theory and Evidence. In: Economics of the Labour Market. Palgrave Macmillan, London. https://doi.org/10.1057/9781137555199_19

Download citation

Publish with us

Policies and ethics

Search

Navigation