David Ruccio — The market for oranges, er, labor

In neoclassical economics, everything comes down to flexible markets. And in neoclassical macroeconomics, everything comes down to the labor market, which should follow the rules of any other market, like the market for oranges.* Hence, the neoclassical lamentation that wages are downwardly rigid.**

As neoclassical economists understand it, if only nominal wages would decline in the face of significant unemployment, an equilibrium between the quantity supplied of and the quantity demanded of labor would be achieved and unemployment itself would cease to exist (because the number of people looking for work would exactly equal the number of jobs being offered by employers). In such a neoclassical world, there aren’t any financial bubbles and crashes, no problems of aggregate demand, no decisions by employers not to hire additional workers even with hoards of cash on hand. It’s all about the inflexibility of the labor market.***

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The market for oranges, er, labor
David Ruccio | Professor of Economics, University of Notre Dame