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How do we know that real wages are too high?

Manning, Alan ORCID: 0000-0002-7884-3580 (1994) How do we know that real wages are too high? CEP Discussion Papers (CEPDP0195). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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It is common belief that the wages that we observe are above the level that would prevail in a competitive labour market and also it is common to believe that wage moderation should be encouraged as a way to keep unemployment down. This paper considers whether we can have confidence in these beliefs. It presents a number of models designed to cast doubt on the conventional wisdom. First, we show that in an efficiency wage model in which there is involuntary unemployment, a binding minimum wage may increase employment. We then present a general equilibrium matching model in which there is involuntary unemployment but wages are below market-clearing levels and raising wages can reduce unemployment. We then consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market-clearing levels.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 1994 The Author
Divisions: Economics
Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
Date Deposited: 12 Aug 2013 15:15
Last Modified: 16 May 2024 11:18

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