The labour market in a Keynesian economic regime: theoretical debate and empirical findings

• Published in: Cambridge journal of economics 2009-09, Vol.33 (5), p.949-965
• Main Author: Herr, Hansjörg
• Format: Article
• Language: English
• Subjects: Central banks; Cost reduction; Economic costs; Economic deflation; Economic systems; Economics; Employment; Equilibrium; Fiscal policy; Income distribution; Interest rates; Keynesianism; Labor market; Labor markets; Labour costs; Labour market; Macroeconomics; Monetary policy; Monopolistic competition; Nominal wages; Price level; Price level changes; Price levels; Product differentiation; Productivity; Unit costs; Wage levels; Wages; Wages & salaries
• ISSN: 0309-166X; 1464-3545
• DOI: 10.1093/cje/ben044

In a Keynesian mode of thinking wages become the nominal anchor for the price level because unit-labour costs in a closed economy represent the most important factor in determining the price level. The second most important driver of price level changes is the exchange rate. A positive economic regime includes nominal wage increases according to trend productivity growth as well as the target inflation rate of the central bank, discretionary monetary policy geared towards growth and anti-cyclical fiscal policy. Since the early 1990s nominal wages in the USA and the UK have followed this wage norm to a large extent. But in Germany, wages have increased below this norm or even decreased, and in Japan this effect has been even more extreme. Overall, while Japan and Germany have suffered from dysfunctional economic regimes leading to low growth, the UK and USA have managed a much more positive interaction between wage development, monetary policy and fiscal policy.