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By David Greenaway (eds.)

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Sample text

To sum up, we have concentrated in this section on different patterns of adjustment in the labour market, both with and without endogenous changes in relative goods prices. This focus has drawn attention to a number of important phenomena which are likely to manifest themselves in any real-world adjustment process. Nevertheless, we have obviously ignored or glossed over a number of important aspects of short-run adjustment, especially monetary considerations and the disequilibrium feedbacks from one market to another.

Hence, 00 measures the competitive market-clearing wage rate in the initial equilibrium. Consider now the effects of a fall in the relative price of Y. Without loss of generality, we choose good X as numerative, which implies that price changes do not affect the location of the Lx curve and that the vertical axis measures the wage rate in terms of good X. The reduction in the price of good X therefore leads to an equiproportionate downward shift in that sector's labour demand schedule from Ly to L'y.

5. The second effect of the shock is to reduce the economy-wide demand for labour at any given w and p, so shifting the LL curve downwards to L'L' as shown. Once again, the transition from the initial equilibrium a' to the new equilibrium b' may take many forms, and the diagram illustrates one of these: the real exchange rate is assumed to adjust rapidly to eliminate incipient disequilibrium in the non-traded good market, while the wage rate is assumed to be downwardly sticky (in terms of traded goods) but equalised at all times across the two sectors.

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