Incorporating international competitiveness into the demand for labour function : some issues of specification and interpretation / P.K. Trivedi and J.N. Alexander.

Abstract

This paper is an attempt to clarify and discuss the theoretical status and the empirical role of measures of international competitiveness that have featured in aggregate models of labour demand. It is argued that the practice of using the real exchange rate as a measure of international competitiveness raises a number of difficulties. Several other approaches which are empirically feasible are discussed . At the empirical level we have compared the contributions of real wages, aggregate demand and international competitiveness as contributors to aggregate employment changes in Australia between 1970 and 1983. Although it is found that the so-called "Classical? mechanism was indeed operating on aggregate employment through this period, we find a number of difficulties with an explanation of employment changes based solely on the changes in real wages and international competitiveness. First, the mechanism itself is not very powerful. Second.it neglects the role of monetary factors. It is found that contrary to the strict monetary neutrality hypothesis changes in real money exerted a powerful influence on employment. We suggest a number of mechanisms through which this effect may have operated and conclude that explanations of unemployment that emphasise only the "Classical" or the "Keynesian" mechanism are inconsistent with observation.