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EFFECTIVE DEMAND, EMPLOYMENT AND THE MYSTERY OF REAL WAGE Aimin Dang JINAN UNIVERSITY (Guangzhou, CHINA) This paper re-elucidates the factors determining the aggregate demand, and puts forward a new unemployment mechanism; while unveiling the mystery of real wage which has long puzzled the economists passingly. This paper shows that increasing the share of salary in GDP can expand the aggregate demand, and also shows that the labor has a nature similar to the Giffen goods,--raising salary can promote employment. This paper has differs from previous studies as blows: a) The relation between income and consumption is a very typical saturation nonlinearity one. For this kind of issues, this paper forsakes the weighted average method, and introduces the sectionalized linearization, a processing method frequently applied in other subjects. b) According to the law of diminishing marginal utility, the limited consumption desire and the infinite money desire, constituted human's desire on the economics. c) Introduces the method of system science, and argues that although the whole behavior is formed by individual behaviors and the interaction between them, however, the whole behavior also restricts the individual behavior in reverse. d) The marginal output of most unemployed workers is far more than their bid wage. This paper argues that, under the restriction of effective demand, the profit maximization behavior of enterprises is transformed into the cost minimization under fixed output. Therefore, enterprises prefer to hire workers producing highest marginal output, till the completion of the order. At this moment, although there are still many workers whose marginal outputs exceed their bid wage in the market, they will not be hired. Keywords: effective demand, unemployment, real wage, distribution JEL Code: E12, E24, J64 [email protected] 510655 Aimin Dang C-701 Room, Dongjin Garden, Yuancun er-heng-lu Street, Tian-he District, Guangzhou City, Guangdong Prov, CHINA Tel: 86-13433993322, Fax: 86-20-28851119 Total 8600 words. 1 1. INTRODUCTION This paper first re-elucidates the factors determining the aggregate demand and its dynamic process, then further delves into the analysis of the formation mechanism of unemployment and finally puts forward policies and suggestions, while revealing the mystery of real wage which has long puzzled the macroeconomists passingly. This study shows that increasing the share of salary in GDP can expand the aggregate demand, and also shows that the labor has a nature similar to the Giffen goods, ----raising salary can promote employment. This paper has differs from previous studies as blows: a) The relation between income and consumption is a very typical saturation nonlinearity one. For this kind of issues, this paper forsakes the weighted average method, and introduces the sectionalized linearization, a processing method frequently applied in other subjects. b) According to the law of diminishing marginal utility, the limited consumption desire and the infinite money desire, constituted human's desire on the economics. c) Introduces the thoughts of system science, and argues that although the whole behavior is formed by individual behaviors and the interaction between them, however, the whole behavior also restricts the individual behavior in reverse. d) The marginal output of most unemployed workers is far more than their bid wage. This paper argues that, under the restriction of effective demand, the profit maximization behavior of enterprises is transformed into the cost minimization under fixed output. Therefore, enterprises prefer to hire workers producing highest marginal output, till the completion of the order. At this moment, although there are still many workers whose marginal outputs exceed their bid wage in the market, they will not be hired. 2 The relation between the real wage and employment is an old topic long puzzling the economists. As many classical economists, Keynes (1936) predicted that the real wage and employment vary reversely, i.e. the countercyclical mentioned frequently later. Keynes (1936, p.17) wrote, “In general an increase in employment will surely lead to the decline of the real wage rate. Thus, I am not disputing this vital fact which the classical economists have(rightly) asserted as indefeasible.” In response to the prediction of Keynes, Dunlop (1938) and Tarshis (1939) put forward the evidence of procyclical movement of real wage. In response, Keynes (1939) specially wrote an article expressing agreement with their evidence. Afterwards, numerous economists conducted a large amount of research on this prediction, and put forward many empirical evidences of procycle, including Bodkin(1969) 、 Mitchell et al. (1985), Bils(1985), Schor(1985), Rayack(1987), etc. However, some economists considered it to be statistically insignificant, such as Blanchard and Fischer (1989,p.19). Therefore, in the 1990's, a relatively consistent conclusion was that in the postwar U.S., the real wages for a representative worker are mildly procyclical or at least acyclical ( Hoehn, 1988). However, in recent years, a series of studies based on longitudinal microdata has changed this conventional wisdom based on aggregate time series data. Solon et al. (1994) argued that the procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregates statistics are constructed in a way that gives more weight to low-skilled workers during expansions than during recessions. In their opinion, the analysis of longitudinal micro-data indicates that real wages have been substantially procyclical since the 1960s. Therefore, they concluded that near-noncyclicality of real wages should not be accepted as a salient feature of the business cycle. 3 Hoehn (1988) once conducted a numerical simulation, which showed an implausibly high correlation between output and the real wage. In more recent years, research documents in this respect have still been published largely, and they found much evidence for strong procyclical movement of the real wage successively, such as Devereux (2001), Shin and Shin (2003), Hart (2006), Anger (2007), Shin and Solon (2007). Devereux (2001) found that although Salaries exhibited little cyclicality, but salaried workers who had income sources from bonuses, commissions, or overtime had procyclical earnings. Shin and Solon (2007) argues that job stayers' real average hourly earnings are substantially procyclical and that an important portion of that procyclicality probably is due to compensation beyond base wages. Solon et al. (1994) considered that theories designed to explain the supposed weakness of real wage cyclicality may be unnecessary, and theories that predict substantially procyclical real wages become more reliable. the macroeconomic models that prevail currently, such as efficiency-wage models [See Solow (1979), Shapiro and Stiglitz (1984), George (1982), George and Yellen (1990)], implicit contract models [See Azariadis (1975), Baily (1974), Gordon (1974)], and insider-outsider models [See Lindbeck and Snower(1985,1986,1988,2002)], are all used to explain the acyclical variation of the real wage, whereas almost none to explain the procyclical movement of the real wage. Why does the real wage move procyclically? This has puzzled the economists for long. As an ancient Chinese saying implies, “It is up to the doer to undo the knot”, to reveal the puzzle of the real wage, we need to set about from Keynes’ theory of effective demand. When talking of the effective demand, the present economic textbooks always closely relate it to MPC. In fact, it was long before that Keynes (1933) put forward the method of 4 calculating the multiplier in two steps, i.e. first, considers how much of a sum of expenditure is converted into income, and next, consider the MPC. Dang et al. (2004) conducted a further research according to this, and pointed out that in case of greatly disparate distribution, the multiplier is closely related to distribution , and weakly correlated with the MPC, thus amended the calculation method of multiplier, which is of great significance to the correct estimation of the aggregate demand .1 At present, the economies of a lot of developing countries are puzzled by domestic demand deficiency: On one hand their GDPs grow at high speeds and the manufacturers face a large amount of productivity surplus,2 on the other hand a great number of workforces lose their jobs,3 and the living standards of people can’t be improved rapidly, while the Gini coefficient remains high, and the society shows a trend of polarization. The real output of these countries has not reached the limit of full employment of various kinds of production factors, a lot of factors will be left unused. The amount of real output totally depends on the aggregate demand of these countries. So the study of aggregate demand and employment is of great importance to solving the realistic problems existing in the economies of developing countries. Like Keynes (1936), this paper also thinks that the equilibrium of full-employment is only a special case, and non-full-employment is the normal state. The reality of productivity surplus and polarization forces us to make such a judgment. As most modern enterprises carry out their production according to the order, so overproduction can basically be overcome and the product market can be cleared basically. However, due to the progress of technology and the accumulation of capital, the capital output ratio has improved by a wide margin, and capital surplus appeared; meanwhile, with population 5 growth and the improvement of education level, the human capital also has increased by a wide margin, and the factor of labor becomes excessive. In summary, the product market can be cleared, while the factor market cannot, forming a pattern of “dual-surplus of labor and capital” (Wang, 2002); in other words, it is productivity surplus, instead of overproduction. The essence of productivity surplus is that factor market cannot be cleared; therefore, we should focus our study on factor market, attaching an importance to the study of the formation mechanism of unemployment. 2. EFFECTIVE DESIRE AND EFFECTIVE DEMAND 2.1. Consumption The relation between income and consumption is a very typical saturation nonlinearity one. For this kind of issues, this paper forsakes the weighted average method, and introduces the sectionalized linearization, a processing method frequently applied in other subjects. 4 That is to say, in this paper, we divide people into the rich and the poor, and assume that the MPC of the rich is inclined to 0 (saturation area), which is totally autonomous consumption; and the MPC of the poor is inclined to 1 (linear area), who consume fully depending on their income. This assumption is representative for those developing countries which are seriously polarized. With this assumption and through the following analysis, we can see that the key factor that determines the aggregate demand is distribution, instead of MPC. At the beginning of present economics textbooks, it is said that the desire of people is infinite, but the resources are finite, therefore the task of economics is simplified to producing more products with limited resources to meet people's desire to the maximum 6 extent. However, it is this seemingly righteous and justifiable reason that lets economics go on a detour. In microeconomics, we repeatedly use the law of diminishing marginal utility to study the consumers' behavior, while in macroeconomics, we emphasize the infinite desire of people and forget the law of diminishing marginal utility thoroughly. It is necessary for us to study the consumption law of the rich. Though low in population, the rich take hold of a large number of resources, machines, factory buildings, technologies, and funds, etc. Most people are under the dominance of these few rich persons, and the lifestyle of most people is to exchange the labor factor they own for the capital factor of the rich. Only by realizing more factors exchange can the poor’s life be improved. So, the further study of the consumption law of the few rich enables the poor to exchange for as much capital as possible. The rich are ordinary people too. However extravagant they are, their consumption law still follows the law of diminishing marginal utility. In other words, their food, accommodation, transportation, consumption, playing, amusement, etc., anything they can buy with money on the market, they will surely feel content at some time. An old saying of China states the same truth: "Millions of hectares of good farmlands in hold, you can only eat a limited amount of rice per day; thousands of spacious mansions in grasp, you can only sleep on one bed at night”. If we quantize the various goods on the market as standard “basket goods” according to human's preference on consumption, anyone's consumption law of this “basket goods” still obeys the law of diminishing marginal utility. No matter how much money a person has, his consumption is sure to have a saturation amount. If this quantity is exceeded, negative utility will occur. 7 Lu (2005) has made a penetrating exposition about this issue. She argued that any consumption needs time, while time is finite to anyone, therefore, the actual consumption capability is finite. To bring this understanding up to the theoretical layer, this paper introduces the concept of “effective desire”. It is true that the “overall desire” of people is infinite, but the desire in economic sense is restricted by market supply. People have a lot of desires, some of which cannot be realized, such as the desire for immortality etc. Why didn't the ancient emperors travel by air or automobile? Why didn't they watch TV or use cell-phone? It isn’t because the emperors had no money, but that there weren’t these products on the market. Traveling by automobile or air, watching TV or using mobile phone pertain to “non-effective desire” to the ancient emperors. Having known what “non-effective desire” is, you also know what “effective desire” is. “Effective desire” refers to a person's maximum desire for the all kinds of merchandises existing on the market, but not including the desire for money. The money is an exceptional case, the human's desire for money is infinity, its marginal utility nearly constant invariable. The limited consumption desire and the infinite money desire, constituted human's desire on the economics. According to the theory of utility maximization, when it comes to consumption and money-earning, the rich will equalize the marginal utilities of the two. If we assume that, near this equilibrium point, the marginal utility of consumption drastically decreases and the marginal utility of money keeps constant, then, when fluctuation occurs to income, for the purpose of achieving utility maximization, the rich will only adjust the quantity of money,and always keep the quantity of consumption a constant. Because once the consumption quantity reduces, its marginal utility will at once exceed that of money. On 8 the contrary, when the consumption quantity increases, its marginal utility will be less than that of money. That is to say, an addition of one rice in consumption will cause the marginal utility of the rich to reach zero, even to reduce to a negative value. However, making a dollar more doesn’t notably change its marginal utility. Therefore, for the reason of convenience, sometimes we roughly equalize this equilibrium point with the effective desire. The effective desire mentioned here is approximately equal to the autonomous demand in the consumption function. Because only rich group with very high income can achieve autonomous consumption free from the reliance on income. As to ordinary wage-earners, their consumption totally depends on their income, with almost no independence. 2.2. Investment In addition to consumption, the rich group needs to invest. The purposes of investment can be summarized into no other than these two: one is to consume, the other is to earn money. The investment for the satisfaction of consumption is restricted by the effective desire, and the investment for earning money by money increment. The purpose of investment is to earn money, but the purpose of earning money is not to invest. When money-earning chances are present, add to the investment, otherwise, wait for chances. Blind investment necessarily leads to the loss of all investment. Sometimes there will be investment bubbles, but the bubbles will inevitably evaporate. This paper argues that consumption-satisfying investments are endogenous, determined by the quantity of consumption and in direct proportion to consumption; while money-earning investments are exogenous, mainly determined by money increment, also 9 influenced by other complex factors. This paper assumes the exogenous variable remains constant, therefore, in this paper, wherever it comes to the static analysis, both the consumption and investment of the rich group will be regarded as a constant. The act of earning money plays an important role in maintaining the stability of the macroeconomic system. If we inflict an external impact on an equilibrium economy, for instance——government uses a deficit suddenly——then this deficit will lead to the increases of aggregate demand, total yield, employment and even investment in a short period of time, but soon when the rich complete earning this sum of money, the economy will return to the original equilibrium level. When the scale of an economic system is larger than the equilibrium scale, as described above, the rich withdraw currency from real economy by earning money; hence the system shrinks and returns to the equilibrium point. On the contrary, if economic scale is smaller than the equilibrium scale, the rich group's demand cannot be met, and their marginal utility of consumption is larger than that of earning money. Then, they will supplement money and expand production till the equilibrium scale is reached. 2.3. Effective demand——aggregate demand Besides consumption, the effective demands from rich group also include investment. The investments of rich groups are mainly to cover capital depreciation. If the capital depreciation rate, capital-output rate and factors' share are given, then the amount of investment totally depends on the rich group's consumption. That is to say, the amount of investment depends on the rich group's effective desire and the technical conditions of production. As stated above, investments for the purpose of earning money are 10 exogenous, and we assume them as a constant. The total of rich group's consumption and investment is their Saturation demand. We can regard it as the autonomous(independent) demand, which can also be called active demand or active order, and the demands from the wage-earners are called passive demand or passive order. For those countries with very serious polarization, we can estimate their domestic aggregate demand like this. Suppose the whole rich group's Saturation demand for the existing merchandises on the market is A, and the distribution proportion is β for rich group and α for workers (obviously α+β=1), then the aggregate demand of this society Qd is: Qd (1) A Once the output goes beyond this quantity, the product market cannot be cleared. Because in the excessive part, workers can smoothly buy the part equal to wage, while the profit part cannot be sold, for it has exceeded the demand of utility maximization of the rich. This aggregate demand model is a static one. In order to deepen the perception to the problem, we explain the dynamic process below. To simplify the question, we might as well suppose that when the macroeconomic system “just starts”, the laborers do not have any purchasing power (might be regarded as totally self-sufficient peasants as well). The first stage: The rich group needs to produce “basket goods” with a quantity of A for themselves in order to meet their own Saturation demand, and pay wage W1 at the same time. W1=Aα 11 The second stage: The market demand is composed of two parts: first, the active demand of the rich group, with a quantity of A still; second, the passive demand from workers, which is the wage of the first stage W1.After finishing these orders, workers can receive a wage with a quantity of W2. W2=(A+ W1)α=(A+Aα)α=Aα(1+α) The third stage: The demand on the market is still composed of two parts: first, the Saturation demand of the rich group A; second, the wages from workers W2. After finishing these orders, workers can receive a wage with a quantity of W3. W3=(A+ W2)α=(A+Aα(1+α))α=Aα(1+α+α2) …… The rest may be deduced by analogy, the wage of workers of No. n stage is Wn: Wn=(A+ Wn-1)α=Aα(1+α+α2+…+αn-1) This is an issue of geometric progression summation. The sum of its infinite terms is: (2) WT A 1 A 1 The dynamic process tends to a stable state finally. Under the stable state, the aggregate demand on the market is composed of two parts: one is the active demand of the rich group A, the other is the passive demand of workers, which equals to the total wage WT. Then we can calculate the aggregate demand Qd (3) Q d A WT A A A We can find out that the aggregate demands of formula (3) and that of formula (1) are consistent. The whole production process is just like the famous saying of Polish economist 12 M.Kalecki, “capitalists earn what they spend; workers spend what they earn”. The profits of the rich group equal to their consumption and investment. The more they spend, the more profits they earn, just like “Widow's Cruse” (Keynes, 1930). Next we give a more general aggregate demand equation which includes the budget deficit B and net export (X-M) below: (4) Qd A B (X - M) ABO B:budget deficit X:export M:import O:net export, O=X-M The above equation is a variation on M. Kalecki's formulation of the theory of effective demand. It indicates that the rich group, during each production period, besides getting the consumption and investment they expect, also get the money equal to the total of budget deficit and net export in quantity, and they do have earned money.5 For a pure consumption model without investment, we can easily get the optimum distribution proportion under that model, which is supposed to equal to the proportion of population. That is to say, if 80% of people make a living by providing labor factor, and 20% of people rely on the non-labor factor, to meet the effective desire of the owners of these two kinds of factors, the share of the labor income must be 80%, and the share of the non-labor income 20%. Obviously this is a very ideal model. If the capital depreciation and technical research and development of the rich group are considered, the actual share of the capital income should be higher than the ideal proportion. The more developed a country is, 13 the higher its capital efficiency, and the lower the proportion it uses to cover capital depreciation. Hence the closer its optimum distribution proportion is to the population proportion. Theoretically, the capital income share of developing countries needs to be higher. If the share of the capital income is too low, it will cause insufficient investment, insufficient supply and merchandise shortage; however, if it is too high, the effective demand will be deficient and the investment and productivity will be surplus. The present actual condition is: The share of the wage income is too low in developing countries, which makes them fall into the mire of effective demand deficiency far too early. The aggregate demand model put forward here is also an economic growth model——a demand growth model. If the developing countries want to make economic achievement, they must work hard to expand the domestic aggregate demand. To expand the domestic aggregate demand, they should adjust distribution to gradually reduce the capital income share and increase the labor income share. Supply and demand are like the two legs of macro-economy, which must advance together. Only stressing supply and production but not stressing demand and consumption, is like walking with one leg, which is more haste, less speed. 2.4. Model test Example 1: According to the China Statistic Yearbook, the GDP of China in 2005 was 18.30848 trillion Yuan, and total wage was 1.979 trillion Yuan, about 10.8% of GDP, and total output of farming, forestry, animal husbandry and fishery was 3.94509 trillion Yuan, about 21.5% of GDP. If all the output of farming, forestry, animal husbandry and fishery is regarded as labor income (surely overestimated), the share of all the labor income 14 in GDP is about 32.3%1, and the share of non-labor factor income deduced herefrom is about 67.7%. Suppose the independent demands (also called the active demand or Saturation demand) of the rich group is 100, then the aggregate demand is 100÷67.7%=147.71. The implication of this subject is like this. The rich group who account for 20% of the population have eaten to their full after consuming 100, but the poor who account for 80% of the population only get 47.71, which is 11.9% of that of the rich ((47.71÷80) ÷ (100÷ 20) *100%), far from enough If increasing the output at this moment, the rich must eat more; maybe they will burst the belly, and negative utility occurs. If products can not be consumed completely, it will cause overproduction and the product market cannot be cleared. Example 2: According to the data provided by US Bureau of Economic Analysis in “Table 1.12 National Income by Type of Income”, 2 the national income of US in 2005 was $10.8876 trillion, and the labor income was $7.0296 trillion, therefore the labor income share of US in 2005 was 64.6%, and the share of the non-labor factor income was 35.4%. Suppose the independent demand of the rich group is 100, then the aggregate demand is 100÷35.4% =282.49. Therefore we know that when the rich group reach the saturation, the masses of the poor have also reached 45.6% ((182.49÷80) ÷ (100÷ 20) *100%). Considering rich groups must cover capital depreciation, then the difference of consumptions between the poor and the rich is basically not so large, and their respective effective desires are basically achieved. Just as the calculation result above, the demand deficiency that the U.S.A. faces is not 1 2 The corresponding data are: 53.9% in 1978, 53.9% in 1989, 42% in 1997, 33.3% in 2004 Please refer to US official website: http://www.bea.gov/national/nipaweb/index.asp 15 as serious as that of China. Its development is more balanced and the polarization is not so conspicuous. Perhaps these two specific instances have revealed all the secrets of the poor and the rich countries. According to the data of US Bureau of Economic Analysis, even in the 1930s, the share of wage in national income of US was above 50%, which kept over 60% after 1940s. By comparison, according to the data in China Statistic Yearbook, the share of wage of China in GDP declined to 10.8% in 2005 compared with 17% in 1980, and the total of wage of workers and the aggregate output of farming, forestry, animal husbandry and fishery in GDP declined to 32.3 % in 2005 compared with 53.9% in 1989. According to the data provided by Checchi and penalosa(2005), the labor share in some OECD countries in 2003 is as follows: 65% in Japan, 64% in Sweden, 62% in British, 61% in Canada, 61% in Italy, 60% in Germany, 58% in France and 52% in Norway. Research finds that in all the rich countries, the shares of their wages in GDP are higher. On the contrary, in those poor countries, shares of the wages in GDP are obviously on the low side, and on decline with the increase of capital accumulation. Though this paper cannot provide the data of the labor income shares of other developing countries, we can also know about the real situation of their income distribution through their increasingly rising Gini-Coefficients. 3. THE MECHANISM OF MODERN UNEMPLOYMENT 3.1. The micro-mechanism of modern unemployment Although the whole behavior is formed by individual behaviors and the interaction between them, however, the whole behavior also restricts the individual behavior in reverse. 16 McKelvey(1999) puts forward the concept of endogenous environment. A common feature of modern enterprises is producing according to orders. From macroscopic perspective, under the restriction of limited total effective demand each enterprise only can get a small share of the effective demand formed during the last stage, which becomes the enterprise’s order of this stage. After completing this order, the workers get the corresponding wages. These wages along with the saturation demand of the rich group, form the effective demand of the next stage. Under the restriction of limited order, the enterprise's profit maximization behavior is transformed into the cost input minimization under fixed output. The lower the cost, the more profit got from the order. We suppose the production function of an enterprise is: (5) F=f(L,K) Then, suppose the price of labor factor is W, the price of capital factor is r, and the marginal output of factors is ML and MK respectively, then it is easy to conclude that the factor combination of cost input minimization of the enterprise should be in accordance with the following condition: (6) ML MK W r This condition is to make the marginal output of each unit of labor equal to the marginal output of each unit of capital. This seemingly somewhat harmonious conclusion hides extreme disharmony beneath. For individual enterprises, any production factor is their cost; therefore they must to the largest extent lower its price. For macro perspective, all enterprises must strive to lower the wages of workers, and sharply counterpose wage against profit. Therefore, this paper agrees with Schor(1985), who thinks the wage is 17 exogenous, determined by custom, technology and the game strength between the employee and employer. Now, we arrange all the workers in a close market in descending order of their (ML÷W), to form a “job-waiting queue”. To achieve cost minimization, the enterprises will scramble for those in the top of the “job-waiting queue”. The number of employees an enterprise hires depends on two factors: one is the size of the order; the other is the extent of the output of workers. If an enterprise fails to complete the order in spite of hiring all the workers whose marginal outputs are more than their bid wage, those at the bottom of the “job-waiting queue” whose marginal outputs are less than their bid wage will be unemployed. This is classical unemployment. However, there is another possibility: if the enterprise has accomplished the limited order before it hires all the workers at the top of the “job-waiting queue” whose marginal outputs are more than their bid wage, then, modern unemployment (involuntary unemployment) occurs. Under modern unemployment, the marginal output of most unemployed workers is far more than their bid wage, which is an extremely typical feature, and the situation of less than their bid wage is extremely rare. This is an ironclad fact, and this kind of conclusion is easy to draw as long as you plunge into the social life a little and do a little survey. Modern unemployment and classical unemployment originate from two kinds of completely different unemployment mechanisms. Let’s make a comparison:A big cage contains a smaller one within, and a bird is encaged in the smaller cage. Obviously, what now restricts the activity of the bird is the small cage rather than the big one. Under classical unemployment, production corresponds to the small cage, and demand corresponds to the big one. But today, with the development of productivity, the former small cage expands to 18 be even bigger than the big one. Therefore, the modern unemployment is subject to the insufficiency of effective demand, market, sales and effective desire of the rich group. From the perspective of enterprise, it will strive to lower the wages of workers to achieve cost minimization. From micro perspective, lowered wage cost not only can bring bigger profit in this stage, but occupy an advantageous position when carving up the aggregate demand, and strive for more orders in the next stage. However, from macro perspective, such behavior of the enterprise will lead to the shrinking of the aggregate demand, and the decrease of total orders and fall into “prisoner's dilemma”. From the perspective of workers, to get a job, they will be reluctant to have their own bid prices lowered, so that they can stand on the front of the “job-waiting queue”. However, from macro perspective, such collective behavior will lead to the overall decrease of workers’ the wages, and the shrinking of aggregate demand, and the decrease of overall employment chances, and fall into “prisoner's dilemma”, too. This is a slightly complicated “prisoner's dilemma” in which multiple sides participate. The general knowledge of game theory tells us that, if their payoffs matrix can be changed by external force, then the Pareto improvement can be achieved. For example, the bid wage of the workers can be raised by an appropriate amount by making use of the strength of the labor union. Thus, the profit of the enterprises in this stage will decrease to some extent, but it’s still profitable, and will be forced to hire workers. Meanwhile, the added wages paid in this stage will be transformed into the order of the next stage, and then, the enterprise will receive a bigger order at the next stage. Facing the bigger order, the enterprise can accomplish this order by simply hiring a few more workers; for there are still workers whose outputs are more than their bid wages in the labor market. Because more 19 workers are hired at this stage, the order of the next stage will be bigger, cycling like this, the profit will be identical to the original one when equilibrium is reached, and the rich still can achieve their saturation demand. The profit of the enterprise does not decrease, but the wages of the workers increase, and the employment increase, therefore, this is a Pareto improvement. The government can also make the enterprises realize cooperative game by establishing the minimum wage system. Everyone volunteers to abide by the bottom line for the minimum wage to game within the framework of the game rule. Therefore, from macro perspective, such restriction is harmless to them as a whole, and may fully exert the productivity of the enterprise and make contribution to social welfare. The principle for hiring workers is like this, so is that for hiring other factors. The enterprises will prefer to choose the cheapest resources and other factors, till the accomplishment of the order. Many resources and alternative solutions of production are left unused,it is not that they lack social value, but not cheap enough instead. 3.2. The macro-model of modern unemployment To study macroeconomics issues, we might as well ignore the differences between the workers, assume all labor are homogeneous. Under this assumption, the enterprise hires workers stochastically, and it will be chaotic to determine who can find a job and who can’t microcosmically, but this does not influence our macroscopic analysis. Suppose each worker hired can complete order P(i.e. the output of an individual worker), this order brings profit R to enterprise, and brings wage W to the worker. Then, in order to complete the aggregate order it is equal to the aggregate demand formula (3) in 20 quantity, the enterprise must hire N workers. Therefore, it is easy to deduce the following relational expression: A (7) N Qd A A A A P P P R R PW P P N: Number of hired workers A:Saturation demand of rich group, including consumption and investment P: Completed order of individual workers, P =R+W R: Profit from order P W: Wage from order P β: share of profit, β=R÷P If we assume that A, P, W are three independent variables, so we can differentiate formula (7) with respect to W as follows (8) N A 0 W (P W ) 2 The above equation indicates that the higher the Wage, the more workers the enterprises must hire, and the more the gross output, and the real wage reveal strict procyclicality. Here, we suppose A, P and W are three independent variables. Readers may ask: can this kind of assumption be tenable? Now we make some analysis as follows. First of all, let’s study the order quantity P which a single worker can complete. The author thinks that if the capital used, technical condition of production, working time and the labor intensity of an individual worker remain unchanged, the output of an individual worker is a constant. Though when wages increase, the workers' enthusiasm will get higher, under the circumstance of strict supervision workers will do job more actively. So, increase 21 of the wage does not remarkably improve an individual worker’s output P, the correlation between wage and individual worker' output is weak, the output P can be regarded as a constant and is irrelevant with wage W. Secondly, let’s study the rich group's saturation demand A. We acknowledged in the preceding study that the rich group's consumption depends on their effective desire, and the rich group's investment totally depends on consumption under a specific technical level. So we can ascertain the rich group's demand has reached a saturation value. Two of the three variables are constants, so the assumption that regards them as independent variables is tenable. We can boost employment and expand output by adjusting the exogenous variable of wage. According to formula (7), (8), the increase of the real wage will cause the increases of effective demand, output and employment, the real wage reveals strict pro-cyclicality, which is highly consistent with the evidence provided by the many literatures mentioned Section Ⅰ, with no need to further elucidate. The model discussed above is built for a closed economic environment, but if an open economic environment is taken into consideration, the circumstance differs. If we consider the budget deficit B and net export (X-M) as active demands,we can get the following aggregate employment formula N (9) A B (X - M) A B O R PW B:budget deficit X:export M:import O:net export,O=X-M 22 If the wage in this area increases, while those of surrounding areas don’t, the enterprises will transfer the orders to the surrounding areas so as to achieve cost minimization. Under such circumstance, the correlation between real wage W and net export O is negative. We can differentiate Formula (9) with respect to W as follow: (10) N A B O 1 O 2 W P W W (P W ) Because the second term is negative in Formula (10), the positive correlation between real wage and employment will be weakened. However, the capital transfer caused by wage increase must occur after the increase of wage. Therefore, Formula (10) is unlikely to be negative. That is to say, under no circumstance will countercyclical occur. 3.3. Some common issues In the face of robust empirical evidence, it seems unnecessary to defend the above theory. But to clarify some puzzles, it is necessary. Under the circumstance that the marginal output of the workers is greater than their bid wage, one more worker hired by the enterprise, one more marginal product (real thing), which is yet not necessarily the marginal profit (money) that the enterprise wants. Only after the enterprise sells out this marginal product, will it become marginal profit. Whether this marginal product can be sold fully depends on the saturation of the aggregate demand in the market. Some may think, after the wage is raised, and the output expanded, but the total profit does not increase, as a result, the profit rate decreases. In fact, this is the so-called “small profits but quick turnover”. The key is not low profit rate, but lower risk. The rate of bank deposit is low, but there’s no risk. Therefore, many people choose it. After the increase of wage, the market is expanded, and business risk relatively decreases. 23 Some may insist that when worker's wage is raised, the rich group's demand will be reduced accordingly. Because there is a large amount of usable idle labor and capital, when worker's wage increases, the rich can maintain their extravagant life by simply hiring more workers, and it is unnecessary for them to be thrifty. Even reversely, when worker's wage is raised, the demand increases, the market situation turns better, social conflicts appeased, and the rich group will probably increase their demand. Some may think that wage rise will cause the transfer of international capital to places of lower wage. In fact, capital transfer also costs, some of which is untransferable. The capital transfer arising from wage increase of a country also contributes to other poor countries and regions indirectly. If the whole world is seen as a closed economy, then the wage increase of any country or region will have a promotion effect on the whole global employment and output. For the issue of capital transfer, we must strengthen international cooperation, and object to “low-wage competitions” between countries, to avoid falling into “prisoner's dilemma”. Some think that it is unfair for those who are willing to accept employment of lower wage to reject them by the minimum wage system In fact, this is the so-called “free market to decide labor price” argument. Studies show that if the labor market is not protected by the law, a good employment level is unable to be kept steady. If we offer no protection and allow those who are willing to accept lower wage level to be employed, some of the employees with higher wage levels will be driven away. As a result, the passive demand in the aggregate demand is reduced unconsciously. The reduction of aggregate demand will inevitably bring about the reduction of total employment opportunity, and then cause more persons to lose their jobs. Once more people are unemployed, the competition of labor 24 market gets fiercer, and more persons would accept jobs with lower wage, thus forming a vicious cycle. Eventually, the wage drops to a level that is just enough to make a living, and always maintains at this low-level being hard to improve. As to those people who are unable to get employment at above- minimum wage level, the government should give an appropriate living guarantee to them, instead of encouraging them to compete with a low price. Such an encouragement will necessarily cause the labor market to collapse (drastic drop of wages and practitioners). Some may think that after the wage is raised, the rich group will replace labor with capital. The author thinks that in a short period, enterprises are unable to replace labor with capital. If a large number of replacements are incurred by wage increase, it will cause investment increase in at least a short time, and this will inevitably cause the increase of demand for labor. Some may think that the increase of wage will lead to price rise and the reduction of aggregate demand. In fact, if the price rise is caused completely by the wage rise, the aggregate demand will inevitably increase. The two models of aggregate demands and aggregate employment both support this conclusion. We can give one more example to explain this issue Example 3: Suppose the total annual pay of a couple is 50,000 Yuan, and the wage cost accounts for 11% of the total price of goods. If the price of an ordinary commercial apartment is 500,000 Yuan, then they need 10 years to afford it without eating or drinking. According to the data above, we can calculate that the wage cost of this apartment is 55,000 Yuan .If the present wage levels are doubled generally; the wage of this couple will be raised to 100,000 Yuan annually. The wage cost of the same house will rise to 110,000 25 Yuan. If we add the increased wage cost to the housing rate, it will be 555,000 Yuan. In this case, this couple needs only about five and a half years to buy the house. Of course, for those living on deposit (such as the retirees), the government can guarantee that their purchasing power is not influenced through monetary policy. This example gives a very useful calculation formula: (11) Real wage=nominal wage ÷ price =nominal wage ÷ (nominal wage + profit) We can conclude from the above formula that, though the increase of the nominal wage leads to price rise, but the real wage increases instead of decreasing. This is a very useful analysis method, which may be called “factor analysis method”. 4. TREATMENT OF MODERN UNEMPLOYMENT Based on the relational expression (7) of employment quantity given above, we can start from the following ways to solve the unemployment problems. First, increase workers' wage W, and reduce the rates to add to the quantity. Wage increase will cause increase of passive demand, thus the aggregate demand and the total employment volume will also increase. For this reason, trade unions are formed and strike movements break out in western developed countries to enable the workers to negotiate with enterprises as a whole, thus providing everybody with a uniform wage which to an extent alleviates employment pressure and insufficient demand. The income share of the wage is higher in the distribution of the national output, which guarantees the prosperity of their country. For the numerous developing countries, if they want to expand domestic demand and achieve economic development, they have to constantly adjust the distribution proportion 26 of factors, to constantly improve the income share of wage. In the upcoming 10 years, China should focus on raising the income share of wage; to raise the share of wage income from 10.8% in 2005 to about 40%. This will greatly improve the people's living standard, expand domestic demand, and lay a solid foundation for building a harmonious and commonly rich society. Second. Reduce each worker's output P. This can be achieved through limiting working time strictly (such as 40 hours every week), reducing work intensity and increasing labor protection, etc. For example, the unemployment is reduced significantly in France after it carries out the 35-hour work week. The experiences of developed countries in this respect are worth adopting. Third, Faced with the international capital transfer, we must implement international cooperation and coordination, do not attract investment by low wage, do not carry out low wage competition, do not shift one's trouble onto others, to avoid falling into “prisoner's dilemma”. In fact, when having deeper understanding on the mechanism of the unemployment, we can find out more better and effective solutions to treat it, which is not detailed in this paper. 5. CONCLUSION The present macroeconomic is to exaggerated human's consumption desire excessively, and deviated from the microeconomics foundation seriously, so that it is unable to profoundly understand the vital significance of the effective demand, and unable to holding the profit maximization behavior of the enterprise. 27 Orders are finite, and productivity is sufficient. Under the restriction of effective demand, enterprises produce strictly according to the order, thus, the profit maximization behavior of enterprise is transformed into the cost input minimization under fixed output. Under this circumstance, although there are many workers whose marginal outputs are greater than their bid wage not hired in the market, the order of the enterprise has been accomplished, as a result, they will certainly be unemployed. In a closed economic environment, increasing wage can boost employment and increase output, and the real wage reveals strict procyclicality. By comparison, in an open economic environment, increasing real wage may cause capital transfer, thus may weaken the procyclicality of the real wage. Although that an enterprise increases wages or employees will certainly cause the increase aggregate demand accordingly, however , this newly added demand will necessarily be divided by thousands of enterprises, which renders us unable to perceive this increase; on the contrary, we only see the decline of this enterprise. However, if we adopt some compulsory measures and policies to enforce the enterprise to increase wages, the increases of total demand and total employment will be conspicuous and perceivable (mathematically, equivalent to zero multiplying infinite). Generally speaking, we are deluded by the bad phenomenon mentioned above and cannot see the “splendid scenery” beneath. As early as more than two thousand years ago, ancient Greek philosopher Aristotle put forward the famous argument “the whole is more than the sum of its parts”, and modern system science pushes further the research of “whole and part”, finding that “the whole is less than the sum of its parts”( Xu,2000, p21) sometimes. That is to say, the conclusion of 28 downfall caused by pay raise of a single enterprise can not be directly copied to the overall enterprises. Currently, the theoretical dilemmas on the employment issues is fully due to our excessive dependence on the superficial experience based on the microscopic level, and completely stagnate on the conclusion about “one factory and one business”, thus hindering us from understanding and grasping the essence of the unemployment issue from the macroscopic level. In EMERGENCE, Holland(1998)reveals the processes that start from a few rules and produce puzzling systems. The model presented in this paper is simple (almost equal to axiom), but it is exactly the rule that macroeconomics and microeconomics must follow to run. A good many dazzling economic and social phenomena are almost correlated with these few simple rules. With respect to the participants of the game, it is indispensable to understand these simple game rules. Notes: 1. Suppose the share of labor income in national income is α, and that of non-labor factor is β, and the MPC of wage-earners is b, then the investment multiplier is 1 . 1 b Dang et al. (2004) pointed out, because the MPC of wage-earners b is high, which reaches nearly 1, while their income share α is far smaller than 1, therefore, the investment multiplier can be simplified as 1 1 1 . 1 b 1 2. According to 21st Century Business Herald, the fields in which productivity surplus exists in China currently include 10 major sectors: steel, concrete, electrolytic aluminum, calcium carbide, coke, hydroelectricity, coal, textile, auto, and alloy iron. 3. In respect of the unemployment situation in China, Mr. Xu Kuangdi, chairman of CPPCC and president of China Engineering Academy, said in March 2007: “(the official 29 statistic of) unemployment rate is 4.6%, excluding jobless graduates, who haven’t registered, as well as surplus rural labor. We conducted a survey, in fact, the total unemployment rate reaches nearly 8%, including those who are laid off and those who are awaiting jobs in large and medium-sized cities.” And the composition of unemployment persons shows a tendency of spreading towards junior population and high-knowledge population. In China, there are about 0.1 billion rural labor forces under the condition of unemployment. 4. 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