Wage curve

Wage Curve is an economic concept that illustrates the relationship between unemployment and wages. The wage curve is downward sloping, indicating that as unemployment increases, wages decrease. This concept was first introduced by economists David Blanchflower and Andrew Oswald in their 1994 book, "The Wage Curve".

Overview

The wage curve is a graphical representation of the relationship between the level of unemployment and the level of real wage rates in an economy. It is based on the assumption that workers are willing to accept lower wages when unemployment is high, due to increased competition for jobs. Conversely, when unemployment is low, workers can demand higher wages as employers compete for a limited supply of labor.

Theoretical Background

The wage curve is rooted in the Keynesian theory of wage and price rigidity. According to this theory, wages and prices do not adjust quickly to changes in the economy, leading to periods of unemployment or inflation. The wage curve provides a mechanism through which wages adjust to changes in unemployment, albeit slowly.

The wage curve also draws on the microeconomic theory of labor supply and demand. According to this theory, the wage rate is determined by the intersection of labor supply and labor demand. When unemployment is high, the supply of labor exceeds demand, leading to a decrease in the wage rate. Conversely, when unemployment is low, demand for labor exceeds supply, leading to an increase in the wage rate.

Empirical Evidence

Blanchflower and Oswald's original study found a negative relationship between wages and unemployment across a range of countries and time periods. This finding has been confirmed by subsequent research, although the strength and significance of the wage curve vary across studies.

Criticisms

Some economists have criticized the wage curve for its assumption of wage flexibility. According to these critics, wages are often set by long-term contracts and are not easily adjusted in response to changes in unemployment. Others have questioned the empirical validity of the wage curve, arguing that the observed relationship between wages and unemployment may be driven by other factors, such as changes in labor market institutions or macroeconomic conditions.

See Also

• Phillips curve
• Unemployment
• Wage rigidity
• Labor economics

References

• Blanchflower, D. G., & Oswald, A. J. (1994). The wage curve. MIT press.