KINKED DEMAND CURVE THEORY AND THE MICRO FOUNDATIONS OF KEYNESIAN INVOLUNTARY UNEMPLOYMENT |
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| Authors: | THOMAS I. PALLEY |
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| Affiliation: | American Federation of Labour and Congress of Industrial Organisations |
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| Abstract: | This paper presents a macroeconomic model in which firms have kinked demand schedules owing to asymmetries in the dissemination of price information amongst consumers. It is then shown that nominal wage reductions may be unable to increase employment, let along secure full employment. The necessary condition is that the lower branch of the kinked marginal revenue schedule be negative. In this case, prices are unresponsive to nominal wage declines, and there is no Pigou effect from lower nominal wages. |
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