What is Labour-Market Flexibility? What is it Good for?

THE EARLIEST KEYNES LECTURES tended to be on Keynesian subjects, either Keynes himself or the parts of economics on which he was a major influence. More recently that habit of piety has weakened or disappeared. I intend to go back to it, but not in the sense that I will be concerned with what Keynes or later Keynesians thought about this or that. The connection is more abstract. The macroeconomic role of the labour market is at the very centre of all that current talk about high and persistent European unemployment and its sharp contrast with the recent experience of the United States. The macroeconomic role of the labour market is also at the heart of one version—more or less the standard version—of Keynesian economics. One legacy of The General Theory—much disputed—is the notion that the true source of excessive unemployment need not be some flaw in the labour market itself. In another standard version of the story, however, a lower nominal wage would correspond to higher employment, with the main chain of causation running through a lower price level, higher real money stock, lower interest rate, and higher aggregate real expenditure. In that story a higher nominal money stock would work just the same, without the need for deflation. From this angle, nevertheless, it looks as if nominal-wage-rigidity is the root of the problem. But other arguments, to be found in the General Theory itself, in Christopher Dow’s Keynes Lecture of a few years ago, and in more recent work by Frank Hahn and myself, claim that full nominal wage flexibility would bring with it enough other problems to make it a non-solution to the