On Real Wage Unemployment

Derek Wilkinson is an associate professor of Sociology at Laurentian
University.

Based on the real wage theory of unemployment, essentially, the authors claim that, while Keynes may be empirically right about interest rates causing housing market responsiveness, interest rates do not greatly affect business capital expenditures. The authors hold wage rates and productivity rates to be the prime factors affecting business investments. Because real wages have increased relative to real output, “paper entrepreneurialism” displaces real manufacturing investment.

Daly and McCharles consider four possible policy options. Demand stimulus through tax reform would increase deficits which are already large. Exchange depreciation would badly affect firms which need exported materials. Government initiatives to stimulate high-technology manufacturing are more likely, due to inadequate governmental knowledge, to merely prop up losers. Generic supply policies emphasize investment in human capital, high savings and investment, and better labour-market adjustment policies. The authors support the latter policy, claiming that governments should focus more on productivity than on redistribution.

The authors specifically exclude higher tariffs and protectionism as a policy option. They state: “... it would be an unfortunate example to other countries and Canada itself could lose seriously by deterioration in the world economic climate for free flows of trade and financial capital” (p.52). Perhaps the authors here overestimated Canada’s influence on the world climate.

They do, however, recommend specific policies which fit in with their general policy option. First, they want free trade with United States. Second, they recommend adjustment assistance for both workers and firms. Third, they suggest that inflation accounting for inventories would reduce the amount of taxes firms need to pay and give them more money for investment. Fourth, that basic scientific research is less important than faster adoption of new technological developments which we can import. Fifth, that more social science research funding might explain and even remedy the lag in the adoption of technology. Sixth, that improvements in labour-management relations are necessary and that the Canadian Labour Market and Productivity Centre should be better funded to help in this. Seventh, that the government should do what it can to reduce uncertainty about future government economic policy so as to better enable firms to plan.