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Cambridge Journal of Economics Advance Access originally published online on December 1, 2008
Cambridge Journal of Economics 2009 33(5):949-965; doi:10.1093/cje/ben044
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

This article appears in the following Cambridge Journal of Economics issue: Special focus: Moral Economy and Development Economics [View the issue table of contents]

The labour market in a Keynesian economic regime: theoretical debate and empirical findings

Prof. Dr. Hansjörg Herr*

* Berlin School of Economics, University of Applied Sciences

Address for correspondence: Professor for Supranational Integration at the Berlin School of Economics, University of Applied Sciences, Berlin, Germany; email: hansherr{at}fhw-berlin.de

In a Keynesian mode of thinking wages become the nominal anchor for the price level because unit-labour costs in a closed economy represent the most important factor in determining the price level. The second most important driver of price level changes is the exchange rate. A positive economic regime includes nominal wage increases according to trend productivity growth as well as the target inflation rate of the central bank, discretionary monetary policy geared towards growth and anti-cyclical fiscal policy. Since the early 1990s nominal wages in the USA and the UK have followed this wage norm to a large extent. But in Germany, wages have increased below this norm or even decreased, and in Japan this effect has been even more extreme. Overall, while Japan and Germany have suffered from dysfunctional economic regimes leading to low growth, the UK and USA have managed a much more positive interaction between wage development, monetary policy and fiscal policy.

Key Words: Institutions • Keynesian • Wages • Employment • Policy coordination

JEL classifications: E02, E12, E24, E61

Manuscript received January 12, 2008; final version received September 12, 2008.


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