Topics in Applied Macroeconomics

Economic theorists have not been much concerned to examine the fundamentals of the labour-supply decision with the result that empirical investigations, which, in accordance with the current methodology, draw their inspiration from theoretical behavioural models, have been rather sparse compared to the amount of work expended on other parts of the standard macroeconomic model, such as the demand for money. A good part of the reason for this is the shift of focus introduced by Keynes in The General Theory [21] which emphasised the importance of the demand for labour in determining the level of employment, and led later writers to neglect the supply side of the market. Many writers (for example Patinkin [26] chs X–XII) have felt themselves free to make the assumption that the labour market is constantly in full-employment equilibrium (due to perfectly flexible wages) and so supply could safely be ignored. More recently, however, the neoclassical attack on Keynes’s conclusion about the possibility of involuntary unemployment has involved a reconsideration of the labour-supply decisions of individuals in the light of optimal employment decisions over time and their effect on perceived wealth, as opposed to the idea that workers simply look at the current level of wages. Thus, whereas unemployment in Keynes’s sense constitutes a welfare loss to society, the new approach asserts that under-utilisation of resources may be freely chosen.