How are Product Demand Changes Transmitted to the Labour Market?

Abstract

In the traditional Keynesian and classical models, the transmission of product demand changes to the labour market generally involves wage-price sluggishness or counter-cyclical real wage movements. In practice, however, real wages are often acyclical or procyclical, and wages and prices are flexible over periods of several years. This paper examines the main channels whereby product demand can affect employment under these conditions. The analysis suggests that the effectiveness of demand management policies under wage-price flexibility depends significantly on the availability of a limited number of supply-side transmission channels.

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