A crucial point to see is that, as we here are concerned with productivity, that we can use subsidies to manipulate the densities, for example by subsidising a particular industry or profession. Doing this of course causes an accounting problem: does the w on the horizontal axis measure productivity before or after such subsidy ? The most practical approach is to use w inclusive of subsidies - because market measurements are always inclusive. Subsidising firms would allow them to hire at higher wages: this would shift d to the right. Subsidising workers would allow them to work for lower wages: this would shift s to the left. What happens to employment is not a priori obvious.
It turns out that the minimum wage is important in practice. Our analysis will strongly rely on minimum wage unemployment. In this we differ a bit from the original position taken by Keynes. As Tobin (1972: 122) states:
“But why is the money wage so stubborn if more labor is willingly available at the same or lower real wage ? Consider first some answers that Keynes did not give. He did not appeal to trade union monopolies or minimum wage laws. He was anxious, perhaps over-anxious, to meet his putative classical opponents on their home field, the competitive economy.”
In my view, Keynes’s argument (as further explained by Tobin) is to the point, and aggregate demand, sticky wages and the co-ordination failures on these are established concepts in macro-economics. However, the record of the Great Stagflation is very much influenced by the minimum wage problem, and thus it is that kind of analysis that merits our attention here.
Amendment to the textbook model on the Phillipscurve
With respect to the textbook macro-economic model in chapter 23, we can introduce a minimum wage component in unemployment uM that can rise gradually over the long run due to taxation. With u = uM + uR (R from ‘remainder’) a possible Phillipscurve with less dampening effect of uR is:
dLog[P] = dLog[P]* -
Log[ (uM + uR) / u* ]