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CAWM Discussion Papers, Universität Münster >
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http://hdl.handle.net/10419/51269
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| Title: | | The purchasing power argument: Could rising wages foster employment?  |
| Authors: | | van Suntum, Ulrich |
| Issue Date: | | 2008 |
| Series/Report no.: | | CAWM discussion paper / Centrum für Angewandte Wirtschaftsforschung Münster 2 |
| Abstract: | | The so-called purchasing power argument of wages (PPA), suggesting that rising wages could increase employment instead of reducing it, is examined within a general theoretical framework. While the demand side is modelled by means of a path-dependent Keynesian model with a Kaldorian saving function, a neoclassical production function is assumed on the supply side. It is shown that there is a core of truth in the PPA, if real wages are lower than marginal productivity of labour. While a temporary demand shock could indeed be overcome by rising wages, it is not possible, however, to outweigh a permanent slump in total demand by that way. Moreover, in contrast to conventional fiscal policy, wage rises according to the PPA imply both a rising price level and the danger of neoclassical unemployment. In an open economy, the relevance of the PPA is generally further reduced. |
| Document Type: | | Working Paper |
| Appears in Collections: | | CAWM Discussion Papers, Universität Münster
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