The purchasing power argument: Could rising wages foster employment?

Arbeitspapier

The so-called purchasing power argument of wages (PPA), suggesting that rising wages could increase employment instead of reducing it, is examined within a general theoretical framework. While the demand side is modelled by means of a path-dependent Keynesian model with a Kaldorian saving function, a neoclassical production function is assumed on the supply side. It is shown that there is a core of truth in the PPA, if real wages are lower than marginal productivity of labour. While a temporary demand shock could indeed be overcome by rising wages, it is not possible, however, to outweigh a permanent slump in total demand by that way. Moreover, in contrast to conventional fiscal policy, wage rises according to the PPA imply both a rising price level and the danger of neoclassical unemployment. In an open economy, the relevance of the PPA is generally further reduced.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CAWM Discussion Paper ; No. 2

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): van Suntum, Ulrich
• Event: Veröffentlichung
• (who): Westfälische Wilhelms-Universität Münster, Centrum für Angewandte Wirtschaftsforschung (CAWM)
• (where): Münster
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/51269
• Last update: 10.03.2025, 11:41 AM CET