The Short Period: Effective Demand and the Labour Market

Abstract

The main objective of this chapter is to examine the role of effective demand and its impact on the labour market. As stated in Chapter 1, the claim that economies are demand-led is a crucial argument of post-Keynesian economics. In fact, effective demand is a key factor of the theory of employment. Contrary to neoclassical theory, as we shall see, a decrease in real wages does not increase the demand for labour. Rather, the opposite is true: an increase in real wages leads to an increase in consumption, which in turn increases the demand for labour and decreases unemployment. As a result, an increase in he minimum wage and in the average wage will have beneficial effects on employment and the overall economy — a conclusion that stands in contrast to what is assumed by those who defend TINA.