Macroeconomics and the wage bargain : a modern approach to employment, inflation, and the exchange rate

This intermediate-level text concentrates on new macroeconomic analysis and is one of the first to focus on labor markets. Presenting a neo-Keynesian treatment of macroeconomics, whose use of wage bargaining and price setting under imperfect conditions make product and labor assumptions closer to the real world, the authors look at important applied work on unemployment, inflation, and external balances. They make available for the first time to undergraduates and non-specialists current literature on major questions of economic policy and performance, especially in Western Europe. Macroeconomics and the wage bargain 1 Contents 6 Introduction 8 Part I The background: macroeconomics with competitive microfoundations 15 1. The classical model of employment and inflation: market-claring and the quantity theory of money 16 1.1 The classical model 17 1.2 Summarizing the classical model using aggregate demand and supply 21 1.3 Conclusions and policy implications 22 2. Keynes's model of employment 22 2.1 Keynes's model of employment: IS/LM analysis and aggregate demand and supply 23 2.2 Keynes versus the classics 31 2.3 Keynes's model and falling money wages 32 2.4 The real balance effect: the classical rejoinder to Keynes 37 2.5 Interim conclusions on Keynes's model 39 Appendix: simple mathematics and geometry of IS/LM 40 3. Inflation and unemployment: Friedman's model 42 3.1 The Keynesian/Phillips model of inflation and the Keynesian-Neoclassical synthesis 42 3.2 Friedman's model of inflation 45 3.3 The natural rate of unemployment 46 3.4 Money in Friedman's model 50 3.5 Fiscal policy in Friedman's model 52 3.6 Macroeconomic policy and the permanent income hypothesis 53 3.7 Conclusions 53 4. The new classical macroeconomics 55 4.1 Rational expectations and the new classical propositions: an introduction 56 4.2 Tools of the new classical macroeconomics 58 Macroeconomics and the wage bargain 104-185.pdf -1 Macroeconomics and the wage bargain 60 4. The new classical Macroeconomics 61 4.3 How do we assess the rational expectations hypothesis? 64 5. The Keynesian counter-attack: fised-price models 65 5.1 The background to the reinterpretation of Keynes's theory of employment: Walras's Law 65 5.2 Keynes's model as the general case: Clower's dual-decision hypothesis 67 5.3 Leijonhufvud's defence of Keynes 69 5.4 Keynesian and classical unemployment: fixed-price quantity-constrained models 70 5.5 Conclusions 76 Part II. Imperfect competition macroeconomics in the closed economy 78 6. The basic imperfect competition model 79 6.1 Wage- and price-setting under imperfect competition: the equilibrium rate of unemployment 80 6.2 Inflation in the imperfect competition model 85 6.3 Comparing the equilibrium rate of unemployment (NAIRU) with the natural rate of unemployment 90 6.4 Employment in the imperfect competition model 91 6.5 Summary 94 7. Economic policy and the imperfect competition model 95 7.1 Policies to shift the equilibrium rate of unemploment: supply-side fiscal policy and incomes policy 96 7.2 The effect of policy on actual employment: the Crowding-out debate 102 Macroeconomics and the wage bargain 186-243.pdf -1 Macroeconomics and the wage bargain 105 7. Economic policy and the imperfect competition model 106 7.3 The effect on inflation and employment of the adoption of a monetary growth rule 110 8. Wage bargaining and policy analysis: some key issues 114 8.1 Expectations hypotheses 114 8.2 Incomes policy: problems with implementation 122 8.3 Wage bargaining and productivity growth 124 Part III Imperfect competition macroeconomics in the open economy 126 9. Extending IS/LM ti the open economy 127 9.1 Goods market equilibrium 128 9.2 The LM curve and the balance of trade: zero capital mobility 130 9.3 Implications of capital mobility for macro policy 132 9.4 Conclusions for the role of monetary and fiscal policy in the short run with fixed prices 134 10. Competitiveness and external balance 135 10.1 The determinants of exports and imports: the role of competitiveness 135 10.2 The Marshall-Lerner condition 136 10.3 Policy analysis and the Salter-Swan diagram 137 Macroeconomics and the wage bargain 244-317.pdf -1 Macroeconomics and the wage bargain 138 Contents 140 11. The imperfect competition model in the open economy 145 11.1 Price-Setting, Wage-Setting, the real cost of imports, and international competitiveness 147 11.2 Equilibrium rates of unemployment and the sustainable rate of unemployment 148 11.3 Using policy to shift the sustainable rate of unemployment 151 11.4 Inflation and employment in the fixed exchange rate open economy 153 11.5 More realistic assumptions about pricing and competitiveness: profit squeeze 157 11.6 Summary and conclusions 160 12. The exchange rate as a policy instrument 162 12.1 Devaluation and real wage resistance 163 12.2 The effectiveness of devaluation: a summary of the debate 166 12.3 Why devalue? 167 12.4 Conclusions 170 13. Floating exchange rates with zero capital mobility 171 13.1 Why float the exchange rate? insulation from external shocks 171 13.2 Reintroducing the competing-Claims equilibrium: the reappearance of the unique equilibrium rate of unemployment 173 13.3 Summary and policy implications 177 Macroeconomics and the wage bargain 318-411.pdf -1 Macroeconomics and the wage bargain 179 Contents 181 14. Floating exchange rates and perfect capital mobility: exchange rate expectations 183 14.1 Exchange market equilibrium 184 14.2 An introduction to policy analysis: fixed prices, fixed wages, and fixed expected exchange rate 185 14.3 Exchange rate expectations and macro policy: a guide to the major results 186 14.4 The Mundell-Fleming results 186 14.5 The fiscalist model: the reserval of Mundell-Fleming 188 14.6 Bringing back the unique equilibrium rate of unemployment: exchange rate expectations 192 14.7 A summary of the floating exchange rate models (perfect capital mobility) 195 14.8 Unique equilibrium rat of unemployment or asymmetry? 196 Part IV Macroeconomic models, stylized facts, and microeconomic foundations 208 15. Further open economy topics 197 15.1 Rational exchange rate expectations: Dornbusch's overshooting model 197 15.2 Exchange rate expectations and government behaviour 199 15.3 The impact of a raw materials price shock 201 15.4 Policy interdependece and the world equilibrium rate of unemployment 204 16. Macroeconomic models and the stylized facts of macro performance 209 16.1 Six stylized facts of macro behaviour in contemporary industrialized economics 210 16.2 The imperfect competition model and the stylized facts 212 16.3 Conclusion 216 17. Wage-Setting in imperfectly competitive labour markets 217 17.1 Microfoundations for the bargained real wage curve 217 17.2 Employer wage-setting: the efficiency wage analogue to the bargained real wage curve 224 17.3 Wage-bargaining institutions and equilibrium unemployment outcomes 228 Macroeconomics and the wage bargain 412-482.pdf -1 Macroeconomics and the wage bargain 230 Contents 232 18. The behaviour of firms and product markets under imperfect competition 237 18.1 Microeconomic arguments for a flat price-determined real wage 238 18.2 Analysis with a downward-sloping price-determined real wage curve 240 18.3 Oligopolistic pricing, the price-determined real wage, and open economy princing behaviour 241 18.4 Comparing partial equilibrium for the firm with the general equilibrium of the firm sector 246 18.5 Conclusion 247 19. The shifting equilibrium rae of unemployment: hysteresis and other explanations 248 19.1 The general idea of hysteresis 250 19.2 The insider-outsider model: pure hysteresis 252 19.3 The long-term unemployment and shiting medium-run equilibrium rates of unemployment 254 19.4 Hysteresis and capital scrapping 256 19.5 Actual, equilibrium, and sustainable unemployment in the open economy 259 19.6 Conclusions 261 References 263 Index 266 Focusing on macroeconomic analysis, this work also includes imperfectly competitive labour and product markets. It presents a 'Keynesian' treatment of macroeconomics, and features the important applied work on unemployment, inflation, and external balances.