Reconsidering the conventional wisdom on wage increases, the choice of technique and employment

Abstract

This paper provides a critical assessment of the neoclassical hypothesis that an increase in the relative price of labour with respect to the price of capital produces a substitution for labour by machinery, thus reducing employment. Several cases of non-uniform wages--in terms of structure as well as in terms of changes--are examined, for both a closed and an open economy. The general conclusion is that, although we cannot rule out instances in which the neoclassical mechanism operates, a priori it is not possible to consider that this represents the general case. Copyright 2002, Oxford University Press.