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-The reason for unemployment was that real wage of (P/W)1was “too high” for
equilibrium of the supply and demand curves for labor.
-If the workers would take a cut in their money wage, W, the cost of producing goods
and services could be reduced and the prices of goods and services could be lowered.
-Thus if workers were willing to take a cut in their money wage, the price level P,
would fall in the money wage, W, and the real wage P/W would be lowered.
-Workers would continue to take cuts in their money wage and price level would
continue to fall until the equilibrium real wage was reached and the economy was
restored to its full-employment position.
-According to Pigou, if wages and prices were flexible, a fully employed economy
would be assured.
sharon kalunda answered the question on April 11, 2019 at 10:31