Structural Change and Economic Dynamics 21 (2010) 219–230 Contents lists available at ScienceDirect Structural Change and Economic Dynamics journal homepage: www.elsevier.com/locate/sced Production, unemployment and wage flexibility in an ICT-assisted economy: A model Andrea Pannone ∗ Fondazione Ugo Bordoni, Via Baldassarre Castiglione, 59-00142 Rome, Italy article info Article history: Received July 2008 Received in revised form May 2010 Accepted May 2010 Available online 24 May 2010 JEL classification: D2 E1 E2 Keywords: Unemployment Wage flexibility ICT Production theory Indivisibility Georgescu-Roegen abstract This paper presents a simple macroeconomic model in which a fall in money wages has contractionary effects on output and employment. As it is well known this argument in itself is not novel: the contractionary effect of a rise in the mark-up is a standard result in Kaleckian models of imperfect competition. The new contribution of this paper lies in the fact that the contractionary effect of a money wage decline is consistent with perfect com- petition and rationality of economic agents. This result depends on an original specification of the production side and the associated implications for pricing. This specification, which embraces many features of modern production (characterized by a massive use of ICT), represents the first attempt to use Georgescu Roegen’s contribution to production analysis within a Keynesian macroeconomic framework. © 2010 Elsevier B.V. All rights reserved. 1. Introduction The dominant theory of unemployment, in its standard or in modern versions, postulates a monotonic inverse rela- tion between employment and the real wage rate, and hence advocates wage flexibility to bring about the re- absorption of unemployment resulting from any shock. Along the same lines, the ‘neoclassical synthesis’, con- sidered in the economic standard literature as the true interpretation of Keynes’s view on the subject, explains unemployment in terms of wage rigidity. 1 In so-called ‘new Keynesian’ models unemployment derives from non-competitive behavior on the part of labor (trade unions) which insist on wage claims higher than the ∗ Tel.: +39 6 54803533; fax: +39 6 54804406. E-mail address: apannone@fub.it. 1 For documentation on this point see Leijonhufvd (1968). competitive, full employment, wage rate: an excessively high level of wages is no longer the result of rigidities but the outcome of optimizing procedures carried out in contexts characterized by asymmetric information (see for instance the efficiency wage models 2 ). Nevertheless, this unemployment could always be reduced, if not totally reab- sorbed, thanks to a cut in real wages. In other term, in all the standard approaches the deter- mination of unemployment depends only on behaviours 2 The essential feature of efficiency wage models is the hypothesis that worker productivity is a positive function of wages, at least over some relevant range. Therefore, firms may be reluctant to reduce wages in the face of excess supply, since the associated decrease in productivity may result in an increase in labor costs (see Katz, 1986). There are different hypotheses to explain the link between wages and productivity that give rise to alternative efficiency models (see for instance shirking models, see Shapiro and Stiglitz, 1984; turnover models, see Salop, 1979 and Stiglitz, 1974, 1986; adverse selection models, Weiss, 1980). 0954-349X/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.strueco.2010.05.002