The Political Economy of Wages and Unemployment: A Neoclassical Exploration

In this tightly argued work William Coleman explores the macroeconomic implications of politically based restraints on competition in labour markets.

Through a suite of compact models the author investigates the consequences of the labour force securing the best terms of sale for its labour by means of the electoral mechanism. He concludes that such ‘electorally optimal’ labour regulation can explain not only wage rigidity and unemployment, but also wage volatility; episodes of excess demand for labour; the co-existence of an inefficient state sector with an efficient private sector; and the preference for a minimum wage over a universal wage regulation. Finally, the approach can rationalize nominal wage rigidity, and not solely real wage rigidity. In sum, the analysis promises to both complete the Classical explanation of unemployment by predicting when, why and how real wages will be rigid, and at the same time to better secure Keynesian insights by suggesting how money rigidity may be characteristic of electorally optimal labour regulation.

The Political Economy of Wages and Unemployment will prove a challenging and stimulating read for academics, students and researchers of economics generally, and more specifically, those with a special interest in macroeconomics and labour economics.