The Employment-Real Wage Relationship: An International Study

Abstract

The neoclassical and Keynesian theories of employment both predict an inverse relationship between employment and real wages in the short run. The observed correlation between employment and real wages, however, has usually failed to conform to this prediction. Dunlop (1938) and Tarshis (1939) reported a positive correlation between real and money wages which, given procyclical movement of money wages, was interpreted as evidence against the theoretical prediction; the statistical significance of these results was, however, challenged by Ruggles (1940) and Tobin (1948). More recent studies by Kuh (1966) and Bodkin (1969) failed to detect a significant relationship between real wages and employment. These findings stimulated a series of contributions by Solow and Stiglitz (1968), Barro and Grossman (1971, 1976), and others, developing alternative models not apparently refuted by the evidence. Barro and Grossman recast macro theory under the assumption that markets did not clear; Modigliani (1977) argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior. Thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation.