The Principle of Effective Demand and the Cyclical Behaviour of Real Wages

In this chapter, relying on the Keynesian analysis of the market for goods, I explore how the principle of effective demand underlying the determination of equilibrium employment may affect the cyclical behaviour of real wages. Specifically, developing a theoretical framework in which output is produced only by means of labour and where firms have adaptive expectations about relative prices, I show that the cyclicality of real wages depends on the way in which the production and the expenditure functions react to employment variations. Thereafter, exploiting the results of some numerical simulations, I give evidence that depending on the values achieved by the employment and output multipliers of aggregate expenditure real wages can display a variety of cyclical patterns.