CoPS/IMPACT Working Paper Number IP-49

Title: Stimulation of Employment in Neo-Classical Models

Authors: Michael Malakellis and Matthew Peter


This paper explores the possibility of a Keynesian-like employment response in multi-sectoral neo-classical models such as the ORANI model of the Australian economy. One of the more controversial applications of ORANI has been its use in designing a macroeconomic policy package which stimulates employment without worsening the external account. This package involves restraining real wages while simultaneously increasing aggregate demand. As expected of a model with a neo-classical structure, real wage restraint boosts employment in ORANI. However, employment responds positively to an expansion in aggregate demand -- a result expected of a Keynesian rather than a neo-classical model. The conclusion is that relative price movements and compositional effects, which are entirely consistent with a neo-classical structure, explain the positive relationship between employment growth and aggregate demand in ORANI and kindred models.)

JEL classification: C68, E24

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