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Is there any link between high wages and unemployment?
SYNOPSIS: POINTS: 1. There is some difficulty as to what 'unemployment' means. It could be the labour force who are not working; it could simply be the claimants. If the market wage for a job is £9/hour and you will not work for less than £10 you are not therefore in the labour market (at that rate) thus you are not unemployed!! Thus all unemployment is voluntary workers pricing themselves out of work (see work by Professor Patrick Minford). 2. If demand falls then real wages - in theory - should also fall to bring the labour market in to equilibrium. If the wages do NOT fall (wage stickiness) then labour may be shed as it too has now priced itself out of work. 3. There would need to be some discussion of the causes of stickiness - trade unions. 4. An increase in wages causes price inflation (money wages can change indefinitely, relative import prices, NIC's, indirect taxes cannot). Inflation causes exports to fall (depending on exchange rates). Higher wages will cause demand (and employment) to rise if financed by productivity; prices alone to rise if not financed by productivity. 5. The theory that unemployment is voluntary and real wage is too high is 'Classical' and is based on: a. What is applicable to one firm is applicable to the whole economy. b. As employment increases the marginal product of labour falls. Thus a fall in real wages raise employment - BUT if real wages fall, demand falls, thus employment fails as though labour is cheaper, less production is needed (less demand) so less labour also. 6. As frequently stated elsewhere in this series of questions, the problem with economies is the difficulty in isolating variables : if high wages cause unemployment and these high wages are caused by powerful union, a decline in union power will cause unemployment to fall - not so in the 1980s BUT this does NOT mean that higher wages do not cause unemployment - merely that is impossible to isolate the two, ie wages and unemployment and see that an increase/decrease in one has on the other. 7. High wages not financed by productivity may cause a firm to become uncompetitive and thus go out of business (this assumes no savings in materials or reduction in profit) BUT these same high wages may reduce labour turnover, improve quality and thus reduce administrative costs. High wages in the economy will increase demand possibly reducing unemployment depending on what the demand is for, whether it can be met by the existing work force and whether the industry concerned is capital intensive.

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