Advances in Finance & Applied Economics by Unknown

Author:Unknown
Language: eng
Format: epub
ISBN: 9789811316968
Publisher: Springer Singapore

5 Conclusion

In this paper, a non-Walrasian fixed price model is formulated where optimum real wage is determined on the basis of efficiency wage consideration unlike SNWMM of Benassy (1986) (where both nominal wage and price are exogenously fixed). By assuming exogenously fixed commodity price, this model also revisits SEWM (Solow 1979) where price is considered to be flexible. Further, the present paper examines the impact of payroll tax like specific or employment tax in the present non-Walrasian structure with efficiency wage. Though study on impact of specific tax is prevalent in SEWM (Yellen 1984; Shapiro and Stiglitz 1984; Johnson and Layard 1986; Pisauro 1991, etc.), analysis related to impact of such payroll tax is missing in standard non-Walrasian structure.

Two regimes are found to be relevant in the present model, that is (i) equilibrium or excess demand in the commodity market with excess supply in labour market signifying the regime without commodity demand constraint (RWODC) and (ii) excess supply of commodity and labour signifying regime with commodity demand constraint (RWDC). It has been observed that in both the cases the firm sets optimum real wage at the point where effort elasticity with respect to real wage is equal to unity (i.e. Solow Condition holds). Though in RWODC employment solely depends on effort function, in RWDC optimum employment is determined on the basis of both the effort function and the prevailing level of effective demand in the economy. It is clear that level of unemployment in RWDC is higher than that of both SNWMM (Benassy 1986) where only demand effect is prevalent and SEWM (Solow 1979) where only efficiency effect works.

Moreover with the incidence of specific taxing in RWODC, optimum post-tax real wage increases and employment falls (similar to SEWM of Yellen 1984), However in RWDC, (i) aggregate demand for output increases with the rise in specific tax if effort elasticity with respect to specific tax is greater or equal to unity; in this particular case, increase in specific tax may have an employment-generating role which is a strong contrast to the existing studies in SEWM (Yellen 1984 in particular) or in RWODC of the present model, where imposition of specific tax always lowers employment, and (ii) if effort elasticity with respect to specific tax is less than unity, impact of rise in specific tax on aggregate demand for output is ambiguous and depends on the magnitudes of (a) the specific tax imposed, (b) effort elasticity with respect to specific tax, (c) effort elasticity with respect to real wage and (d) marginal propensities to consume for both wage and profit earners.

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