The Effects of Wages on Aggregate Employment: A Brief Summary of Empirical Studies

Melbourne Institute Working Paper No. 14/00

Date: September 2000


Elizabeth Webster


This paper provides non-technical summaries of theories which posit a relationship between aggregate employment and real wages and presents results from Australian and selected overseas empirical studies. Neoclasssical supply side theories assume that real wages, for given endowments of physical capital, primarily influence the cost of employing labour, and have an inverse relationship to aggregate employment. Keynesian demand side theories maintain that real wages affect both demand for labour as well as the relative costs of employing different techniques of production. Most estimations of the wage elasticity of demand for labour assume that real output is fixed and are thus not proper elasticities of demand. Recent Australian estimates range from -0.15 to -1.0 but the equations are not long run estimates as they include either output or the capital stock as an explanatory variable.

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