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Keynesian Involuntary Unemployment and Sticky Nominal Wages

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  • Holmes, James M
  • Hutton, Patricia A

Abstract

This paper presents a model in which sticky nominal wages and Keynesian involuntary unemployment result as a consequence of the intertemporal optimization decisions of profit-maximizing monopsonistic firms and fully rational and informed workers in an uncertain environment. Uncertainty associated with the business cycle and its impact on product price generates disequilibrium wages and identifies the labor demand function in contractions and the supply of labor in expansions. The theoretical prediction of a negative relationship between real wages and employment during contractions and a positive relationship during expansions is strongly supported by the empirical evidence presented. Copyright 1996 by Royal Economic Society.

Suggested Citation

  • Holmes, James M & Hutton, Patricia A, 1996. "Keynesian Involuntary Unemployment and Sticky Nominal Wages," Economic Journal, Royal Economic Society, vol. 106(439), pages 1564-1585, November.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:439:p:1564-85
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    Cited by:

    1. Colombo, Luca & Weinrich, Gerd, 2003. "The Phillips curve as a long-run phenomenon in a macroeconomic model with complex dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 1-26, October.
    2. Kandil, Magda, 2007. "The wage-price spiral: International evidence and implications," Journal of Economics and Business, Elsevier, vol. 59(3), pages 212-240.
    3. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, September.
    4. James M. Holmes & Patricia A. Hutton, 2005. "A Stochastic Monopsony Theory of the Business Cycle," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 206-219, January.
    5. Thomas J. Carter, 2005. "Monetary Policy, Efficiency Wages, and Nominal Wage Rigidities," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 349-359, Summer.
    6. Luca Colombo & G. Weinrich & F. Bignami, 2000. "A Dynamic Non-Tatonnement Macroeconomic Model With Stochastic Rationing," Computing in Economics and Finance 2000 198, Society for Computational Economics.
    7. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.

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