Prosperity and Depression.pdf

Chap. 13 The Multiplier, Rigidities and Public Spending 495fall pari passu with money wages. l The "classicist" Professor PIGOUis much more cautious and pessimistic in this matter when he says thatin certain situations (under slump conditions) wages sometimes wouldhave to fall to zero in order to bring about immediately full employment.2In order to arrive at a definite conclusion on this question, it wouldbe necessary to work. out a whole theory of employment and output" indynamic terms. We would have to study wage changes in their influenceon costs as weB as demand (buying power of the worker). Therelative speed of the various reactions and the order in which they occurwould be very important. If, e.g., a reduction of labour cost inducedproducers to expand output quickly, payrolls may remain unchanged or1 The assumptions underlying this contention have been"" well analysed andtheir unreality and inconsistency with other assumptions made in Mr. Keynes'theory conclusively demonstrated by Mr. James Tobin in "A Note on the MoneyWage Problem:' in Quarterly Journal of Economics (Vol." 55, May 1941, pages508-16). The Keynesians deny, of course, that a price and wage decline willnecessarily lead to full employment. But it will be shown that this denial isuntenable. What could be denied is that full employment will be reached at areal wage level short of zero.2 See" pages 242-44, above. The argument could be put also in terms ofemployment rather than" in terms of unemployment. But it should be observedthat even in the short run (with the total labour population unchanged) a givenchange in unemployment does not necessarily imply an equal change (in theopposite direction) of employment. In the event, e.g., that un~mployment decreasesin response to a fall in wages, employment may increase by more if thesllpply curve of labour is positively inclined, i.e., if more people are eager towork and if workers are eager to work "longer hours at a lower wage than at ahigher one. Or a given decrease in unemployment may be associated with asmaller increase in employment, if the supply curve of labour is negatively inclined,i.e., if fewer people care to work at a lower wage level than at a higherone.These relationships are impottant and must be kept in mind in practical discussionsabout the level of unemployment. It has, for example, been said thatthe unemployment figures in this country are misleading, because if a part ofthe unemployed found work other members of their families would no longerseek work. Hence to eliminate a certain amount of unemployment, employmentneed rise only by less. For a discussion of these matters, see the article byRussell A. Nixon and Paul A. Samuelson, "Estimate of Unemployment in theUnited States" in" Review of Economic Statistics, Vol. 22, August 1940, pageszoz et seq. and W. S. Woytinsky, ibid., May 1941, pages 68-77.In order to make the proposition at all interesting some lag must be allowedbetween the wage reduction and its effect 'on employment. In the very shortrun which is insufficient to make the necessary technical arrangements for moreemployment the elasticity of demand for labour may be close to zero.