Introduction

The subjects covered in this book are among the most controversial in the history of economics as an academic discipline: the relation between wages and employment, the effects of wages on distribution, and the relation between distribution and growth. However, taking a look at the state of mainstream economics today, all of these debates seem to have been resolved by and large. In New Classical as well as in mainstream New Keynesian Economics there is a clear cut inverse relation between real wages and employment, at least in the long run. This is also true for the ‘new consensus’ models in macroeconomics.1 Although the New Classical and the New Keynesian schools of thought differ with respect to the determinants of short-run economic activity and also with respect to the effectiveness of macroeconomic policies, in the long run it is the real wage rate which determines employment. Therefore, the mainstream in both schools of thought focuses on structural reforms in the labour market and in the welfare state when it comes to fighting persistent unemployment. To improve labour-market flexibility and to make the social benefit systems more ‘employment-friendly’ is regarded as the key to raising employment. This usually includes the reduction of employment protection legislation, of benefit replacement rates and durations, and of the tax wedge as well as the decentralization of wage-setting in order to adjust real wages to workplace productivity.