By Guinevere Liberty Nell (auth.)
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Additional resources for Austrian Theory and Economic Organization: Reaching Beyond Free Market Boundaries
Deregulation bias tends to be liberal while a Marxist bias is clearly interventionist. The bias toward wage reduction is more ambiguous, and is sometimes taken to require weakening the position of labor while in other cases implying an active, inflationary stance that allows real wages the opportunity to fall. Wage reduction bias follows the most naturally from the labor surplus view of unemployment, and is therefore considered first. Wage Reduction Bias If the default conception of unemployment is a case of labor surplus, the natural solution to the problem is wage reduction.
As long as demand is stable or increasing, wage growth will proceed normally. Consumption habit formation should not occur to the right of market equilibrium because there is no wage rate for anchoring habits. This is consistent with the generally held view that wages are not upwardly rigid; they only exhibit rigidity in response to negative demand shocks. A negative demand shock will not result in substantial wage reduction in this case, even if the labor market clears. 2 presents a plausible mechanism for relatively stable wages in the case of a negative demand shock.
There is nothing wrong with being concerned about this, and thus no reason to privilege the problem as outlined in introductory textbooks. The BLS definition of unemployment, which is the metric that makes headlines and moves elections, is broader than the labor surplus concept of unemployment that is casually (and in some cases formally) of interest to economists. The critical feature of this definition is that it can emerge when labor markets clear; when the supply of labor is equal to the demand for labor and there is no labor surplus.
Austrian Theory and Economic Organization: Reaching Beyond Free Market Boundaries by Guinevere Liberty Nell (auth.)