Cumulative Causation and Unemployment

More than fifty years on, Verdoorn’s Law remains significant because it enters as the key ‘stylised fact’ in the Dixon-Thirlwall (1975) model, a model that has come to be regarded as the ‘standard’ model of cumulative causation (see McCombie, 2002, this volume). Indeed, it is precisely because of Verdoorn’s Law that growth in this model is cumulative. This is because without it there would be no tendency for an initial growth advantage in the model to (positively) feed back into labour productivity growth, which is a necessary prerequisite in the model if an initial growth advantage is to be retained (Dixon and Thirlwall, 1975, pp. 205–6). However, the emphasis in this chapter will not be on the vital role that Verdoorn’s Law plays within the Dixon-Thirlwall (1975) model, for this is both obvious and well-known. Rather, we first concentrate on relaxing the model’s implicit assumption that workers are passive to the implications of firms’ pricing decisions for their real wages. To achieve this relaxation we draw on the NAIRU literature,2 a literature in which workers only accept the implications of firms’ pricing decisions for their real wages if they are consistent with their own aims in the wage bargaining process.3