Full text: Brief von Kurt Rothschild an Fabio Petri

in W.E.G. Salter, Productivity and Technical Change, Cambridge 1960, 
pp.43/4. Leibensteins work on X-Efficiency is also relevant. 
I find the last part of your letter very interesting, where you 
explain the "habit" of resisting real wage reductions in face of unemploy 
ment by the existence of doubts about their effectiveness as a job crea 
tor. I think that this is a very fruitful idea. The Swedish case, which 
you mention, is a good example, because the neo-classical idea of a strong 
negative relationship between wages and employment has its strongest 
base in a small open economy which has to compete in foreign markets 
(so that higher wages increase costs without contributing a proportional 
share to effective demand). The Swedish wage reduction was particularly 
helped by the fact that it was partly based on devaluation so that there 
was a simultanneous reduction in all wages and relativities were not 
endangered. But other mechanisms may also contribute to rigid wages. 
Take the now very fashionable insider-outsider theories (various writings 
by Lindbeck and Snower and by others). Insiders (incumbents) who have 
a job ask for high wages consistent with their continued employment, 
and unemployed outsiders cannot underbid them because employers will 
not accept their offers. This is so because outsiders have not yet ac 
quired the necessary inside qualifications ("learning by doing") and 
insiders might react negatively to attempts to bring some of them in 
on the basis of lower wages. Thus wages can remain rigid. By the way: 
I am not worried by any "puzzle", why real wages are not (drastically?!) 
reduced when unemployment exists. This is a fact which we observe as 
widely accepted social behaviour. This should be explained (if possible), 
but it is only a "puzzle" if we stick to the behavioural theory of neo 
classic economics which makes us believe that individual economic interes 
ts and optimising behaviour rule the game. 
Yours sincerely
	        

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