Business cycle and wage policy

Summary This article presents a model of the business cycle and economic growth which explains the deviations of strategic macro-economic variables from their equilibrium values. It is assumed that the price mechanism will clear the goods market yearly, such that an equilibrium between effective demand and the profitable production capacity will be attained through the equilibrating price competition of entrepreneurs. However, a yearly labour market equilibrium will not be reached. Imperfect wage competition will only restore equilibrium in the very long run. Through a Koyck lag in the wage-setting function, i.e. between the rise of real labour costs per unit of product and the level of strain between supply and demand on the labour market, a lasting wage-push will generate a cyclical process that in some circumstances may take forty years. For, the lower the short-run elasticity between the real wage increase and the strain variable, the more lasting the cyclical process will be. A forty year cyclical movement shows a remarkable correspondence between the observed data in the 1950's, 1960's, 1970's and 1980's of this century and the simulations of the model.Originally published in Dutch in J.A.H Maks and E. Wester (eds.),Met het oog op de werkelijkheid, Opstellen over economie en beleid voor F. Hartog, H.E. Stenfert Kroese b.v., Leiden, 1983, pp. 191–213.