Economics 101 Revisited

For years, free-market economists have been telling us that low wages go with low unemployment and high wages with high unemployment. When labor is scarce, in other words, it gets more expensive. Everybody knows that, right?

Well, we're all wrong, according to a new study by Dartmouth economist David Blanchflower and Andrew Oswald, a former Dartmouth prof now based at the London School of Economics. And this was no mean study; the two economists crunched numbers involving 12 nations, 3 0 years, and 3.5 million people. "Macro economists have always thought there is a stable relationship between wage levels and unemployment," explains Blanchflower. "But they thought it was a positive rather than a negative relationship—that when one goes up so does the other, because if wages go high enough, the number of individuals wanting to supply their labor exceeds the number that can be employed and the result is unemployment. This shows just the opposite."

Why should this happen? The authors refuse to speculate, saying that is a matter for further study. But Blanchflower offers this tidbit. "The curve that we have found would not have been predicted by the current generations of economics textbooks," he says. "But it is exactly that predicted by a new and still controversial branch of macroeconomics. That theory has not reached the textbooks yet, but when it does, those texts will have to be rewritten." In the meantime economic revisionists should look for Blanchflower and Oswald's new book, The Wage Curve, to be published this winter by MIT Press.