IDEAS home Printed from https://ideas.repec.org/p/muc/wpaper/200126.html
   My bibliography  Save this paper

The Purchasing Power Argument – Could Rising Wages Foster Employment?

Author

Listed:
  • Ulrich van Suntum

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.

Suggested Citation

  • Ulrich van Suntum, "undated". "The Purchasing Power Argument – Could Rising Wages Foster Employment?," Working Papers 200126, Institute of Spatial and Housing Economics, Munster Universitary.
  • Handle: RePEc:muc:wpaper:200126
    as

    Download full text from publisher

    File URL: http://www.wiwi.uni-muenster.de/cawm/forschen/Download/Diskbeitraege/DP_2_Can_rising_wages_foster_employment.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    3. Pagano, Marco, 1990. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," Economic Journal, Royal Economic Society, vol. 100(401), pages 440-463, June.
    4. Jürgen Jerger & Jochen Michaelis, 2003. "Wage Hikes as Supply and Demand Shock," Metroeconomica, Wiley Blackwell, vol. 54(4), pages 434-457, November.
    5. Michal Kalecki, 1971. "Class Struggle And The Distribution Of National Income," Kyklos, Wiley Blackwell, vol. 24(1), pages 1-9, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van Suntum, Ulrich, 2008. "The purchasing power argument: Could rising wages foster employment?," CAWM Discussion Papers 2, University of Münster, Münster Center for Economic Policy (MEP).
    2. Pichelmann, Karl & Schuh, Andreas-Ulrich, 1996. "The NAIRU - Concept: A Few Remarks," Economics Series 36, Institute for Advanced Studies.
    3. Jürgen Jerger & Jochen Michaelis, 2003. "Wage Hikes as Supply and Demand Shock," Metroeconomica, Wiley Blackwell, vol. 54(4), pages 434-457, November.
    4. Michelle Gilmartin & David Learmouth & J Kim Swales & Peter McGregor & Karen Turner, 2013. "Regional Policy Spillovers: The National Impact of Demand-Side Policy in an Interregional Model of the UK Economy," Environment and Planning A, , vol. 45(4), pages 814-834, April.
    5. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    6. Erkki Koskela & Ronnie Schöb, 2002. "Alleviating Unemployment: The Case for Green Tax Reforms," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 20, pages 355-378, Edward Elgar Publishing.
    7. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
    8. Lloyd Ulman, 1992. "Why Should Human Resource Managers Pay High Wages?," British Journal of Industrial Relations, London School of Economics, vol. 30(2), pages 177-212, June.
    9. Chéron, Arnaud & Hairault, Jean-Olivier & Langot, François, 2004. "Labor Market Institutions and the Employment-Productivity Trade-Off: A Wage Posting Approach," IZA Discussion Papers 1364, Institute of Labor Economics (IZA).
    10. Sergio Destefanis & Matteo Fragetta & Giuseppe Mastromatteo & Nazzareno Ruggiero, 2020. "The Beveridge curve in the OECD before and after the great recession," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(3), pages 411-436, September.
    11. repec:spo:wpecon:info:hdl:2441/6120 is not listed on IDEAS
    12. Milen Velev, 2015. "A research on the relationship between the unemployment rate and the inflation rate in Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 40-59,60-79.
    13. Engelbert Stockhammer & Simon Sturn, 2012. "The impact of monetary policy on unemployment hysteresis," Applied Economics, Taylor & Francis Journals, vol. 44(21), pages 2743-2756, July.
    14. Brown, Alessio J.G. & Merkl, Christian & Snower, Dennis J., 2011. "Comparing the effectiveness of employment subsidies," Labour Economics, Elsevier, vol. 18(2), pages 168-179, April.
    15. Fanti, Luciano & Gori, Luca, 2013. "Efficient bargaining versus right to manage: A stability analysis in a Cournot duopoly with trade unions," Economic Modelling, Elsevier, vol. 30(C), pages 205-211.
    16. Daniel Cardona & Fernando Sánchez-Losada, 2004. "The Unemployment Benefit System: a Redistributive or an Insurance Institution?," DEA Working Papers 8, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    17. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
    18. Kee, Hiau Looi & Hoon, Hian Teck, 2005. "Trade, capital accumulation and structural unemployment: an empirical study of the Singapore economy," Journal of Development Economics, Elsevier, vol. 77(1), pages 125-152, June.
    19. V. Ragupathy & Stefano Zambelli & K. Vela Velupillai, 2013. "A Non-linear Model of the Trade Cycle: Mathematical Reflections on Hugh Hudson's Classic," Australian Economic Papers, Wiley Blackwell, vol. 52(2), pages 115-125, June.
    20. Christopher A. Pissarides, 2003. "Unemployment in Britain: A European Success Story," CESifo Working Paper Series 981, CESifo.
    21. Raddatz, Guido, 2015. "Mehr Arbeit wagen," Argumente zur Marktwirtschaft und Politik 129, Stiftung Marktwirtschaft / The Market Economy Foundation, Berlin.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:muc:wpaper:200126. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Norbert Hiller (email available below). General contact details of provider: https://edirc.repec.org/data/ismuede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.