Other references which put the Phillipscurve in perspective are Okun (1981), Blanchard & Fischer (1989), Friedman (1991), The Economist (1994) and Phelps (1994). Extensive theoretical and empirical work has been done by the Central Planning Bureau (1992a&b), Gelauff (1992) and Colignatus (1992b).
25. Summary of current views
It is useful to recognise some current views on the labour market and the influence of taxes. This allows us to better see the impact of our new analysis.
A simple view
There exists a simple popular view that makes two errors:
· it is static and not dynamic
· it assumes homogeneity and not heterogeneity.
This model is the comparative statics model with homogeneous supply and demand for labour. Borjas (1996:159), Mankiw (1998:125) and The Economist of February 26 1994 present that model. As a model it of course is consistent and it can help us to get our thoughts started, but as a representation of real markets it is erroneous.
Figure 19 gives the wage W on the vertical axis and supply and demand quantities on the horizontal axis. (Note the causal order.) It must be mentioned that marginal tax rates have played a role in the deduction of the supply and demand curves.
In this Marshallian model, the original equilibrium is attained at the intersection of the LS and LD curves, at wage W° and employment LE°. An income tax causes workers to demand a higher wage, and supply shifts up, to LS1. Premiums that raise wage costs for employers cause these employers to offer a lower direct wage, and demand shifts down, to LD1. The new equilibrium of LS1 and LD1 is LE < LE° where employers pay direct wage W1 > W° and where workers receive net W2 < W°.