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Cambridge Journal of Economics 26:179-200 (2002)
Copyright © 2002 Cambridge Political Economy Society

Article

Reconsidering the conventional wisdom on wage increases, the choice of technique and employment

Angelo Reati

Commission Européenne, Beaulieu 1, B-1049 Bruxelles, Belgium; angelo.reati{at}cec.eu.int

Abstract

This paper provides a critical assessment of the neoclassical hypothesis that an increase in the relative price of labour with respect to the price of capital produces a substitution for labour by machinery, thus reducing employment. Several cases of non-uniform wages—in terms of structure as well as in terms of changes—are examined, for both a closed and an open economy. The general conclusion is that, although we cannot rule out instances in which the neoclassical mechanism operates, a priori it is not possible to consider that this represents the general case.

Key Words: Choice of technique • Capital/labour substitution • Relative price of factors • Wages and employment


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