When I was still a callow undergraduate at York University in Toronto, I remember that in one of my first year classes we had a “guest lecturer” from the University of Toronto. I forget his name, but he told us a joke about economics that I still remember quite vividly, and is completely germane for my later discussion about the labour market. He told us that: “economists have intellectual orgasms when lines cross!” 

How very true! If we look, for instance, at one of my lower level economics textbooks, we see what has almost become a cliché of economic analysis: a supply curve sloping upwards combined with a demand curve sloping downwards, which cross to produce our “intellectual orgasm” at the market clearing equilibrium! Here is the hackneyed “Economics 101” view of the labour market, taken from Macroeconomics: Canada in the Global Environment, 4th edition, by Michael Parkin and Robin Bade, page 703:

When I think back to my freshman year at York University, I also recall that my political interests tended to favor the views expressed by Milton Friedman. In fact, I had the York University Book Store special order me two books by Friedman: Capitalism and Freedom: The Classic Statement of Milton Friedman’s Economic Philosophy and Free to Choose: A Personal Statement (co-authored with Rose Friedman). 

Now that I reflect back, I find these past experiences to be rather ironic in nature. Free to choose? Really? Take a look at the graph again. Where exactly is the “choice” in this analysis? Let us pretend for the moment that I am a sadistic monster with some desire to torture the working classes. If I choose to set the wage rate below the equilibrium rate, let’s say at $2 per hour in this example, then, the market forces will fight me as an implacable foe. I will lose, and the wage will rise back to the $20 per hour rate. On the contrary, if I were a very magnanimous angel, maybe I would set the wage rate at $40 per hour, because I want to be as generous as possible to the working classes. But again, the impersonal forces of the market will fight me interminably, until I lose again. So whatever the market says go; I get to “choose” what the market forces of supply and demand tell me.

Or to put it more starkly, this model rules out government intervention in the labour market. If the government plays the role of “sadistic monster” by deliberately setting the wage rates below the market clearing rate, then it will just be inducing a rebellion against itself. It will jeopardize its popularity and its ability to get reelected. If the government were to set a minimum wage above the market equilibrium rate (in this example above $20 per hour), then it will just create lots of unemployment for the working classes. By setting the wage artificially too high, the supply of labour will far exceed the demand for labour, and the “gap” will be all the unemployed workers. So a putatively benevolent and magnanimous policy of minimum wage laws will end up harming the working classes.

So game over for those pesky labour market interventionists. 

Looking at Some Alternative Models of the Labour Market

Not so fast! Maybe the game isn’t over! 

Through my research, I have stumbled across some alternative models of the labour market, which I want to briefly bring to my readers’ attention. These models look very different from the standard textbook version of the labour market. 

One of the obvious differences is the existence of multiple equilibria, i.e., the labour market may have more than one possible “solution” or “outcome.” And if the labour market has more than one possible solution, then we actually now face a possible choice, after all! If the standard economic model can give economists “intellectual orgasms” when just two lines cross, then these models will surely blow their minds with these multiple lines crossing!!! 

One book that I stumbled across is called Introduction to Post-Keynesian Economics by Marc Lavoie. In this book we are presented with the following model of the labour market, which is described as follows: “With a positively-sloped or backward-bending labour supply curve, the short-period Kaleckian model suggests the existence of two possible full employment equilibrium positions” (97). The model looks like this:

We see the existence of two possible equilibria, the “good” solution for labour at the point labeled H and the “bad” solution for labour at the point labeled L. Note that both H and L are possible “equilibrium solutions,” i.e., they represent points where labour supply and labour demand (the “effective” labour demand) curves intersect. 

Why is the H solution “good” and why is the L solution “bad” for labour? The answer is simply found by looking at the axes of the graph. The vertical axis has three points labeled as some variation of “w/p.” Labour wants to maximize w/p, because w/p represents the “real wage rate.” So from the point of view of labour, the solution “higher up” on the graph is to be preferred. 

When looking horizontally, the ideal solution for labour is to be as far to the right on the graph. This is because the horizontal axis represents output and employment. So the perfect solution from the point of view of labour is H because it is furthest to the right (implying the maximization of output and employment) and furthest up (implying the maximization of real wages). 

Conversely, outcome L is the “nightmare scenario” for labour because it is the complete opposite of H. Real wages are at the lowest possible value; output and employment too are at their lowest possible values. Point L implies very low output, very low employment, and very low real wages—it implies poverty and austerity for the working classes. 

Lavoie then poses this question—the most natural one to ask—“given these two possibilities, which of the two equilibrium positions, L or H, has the highest probability of being realized?” (98) His conclusion is that there is a tendency for the labour market to drift towards the L solution—the nightmare solution for labour:

If the labour market were deprived of conventions, rules, regulations, or institutional anchors, the nominal wage [i.e., the wage measured in dollars]…would trend downwards…in such a flex-price economy [i.e., an economy where prices adjust quickly, a truly free market], with falling nominal wages and stable prices, the real wage [i.e., the wage measured in terms of what the workers can actually buy, such as computers, cars, pens etc.] would tend to fall, until it reaches (w/p)L , which corresponds to the low full employment equilibrium (98). 

Lavoie’s conclusion is that state intervention is needed to prevent the tendency for the labour market to slide down into the nightmare scenario of L. State intervention, according to Lavoie, is needed to maintain the preferred solution from the point of view of labour, namely, solution H. He writes:

While the Kaleckian multiple-equilibrium model shows that market forces can push the economy towards a low equilibrium with low levels of wages, output and employment, it also shows that adequate legislation and institutions can push the economy towards higher levels of employment, higher real wages, and higher living standards (99).

I will now mention one other model that I came across. I want to just quickly make my readers aware of this model. This model of the labour market is found in the book called How Markets Work: Supply, Demand and the ‘Real World,’ by Robert E Prasch. In this model we now have four possible solutions: two stable equilibria, and two unstable equilibria: 

What is most interesting about this model, I think, from the point of view of labour, is the solution labeled “D Stable” (which corresponds to the wage labeled wp. This is the worst possible intersection of labour supply and labour demand, since it corresponds to the lowest possible wage for labour. In this situation, the amount of labour employed is actually quite high, i.e., the “D Stable” equilibrium is very far to the right. This solution corresponds to an outcome with the lowest possible wages and the highest possible amount of labour being used. It looks as though workers are being worked to death—(speaking sarcastically) all work and no pay. 

This is how Prasch summarizes this model of the labour market (bold emphasis mine):

The novelty of the revised labor supply schedule…is that it features two locally stable equilibrium points—points B and D. These reflect high wages/low hours and low wages/high hours respectively…


Under “free market” conditions the system has a built-in tendency to gravitate to one of these two points and remain there. The particular equilibrium that is eventually achieved is entirely dependent upon initial conditions in the market. 


This is a critical finding. If this theory is a plausible representation of the low wage labor market it follows that no amount of education, training, exhortation, or lectures on moral uplift directed at the poor will force the labor market equilibrium to move from point D to point B. Once achieving a poverty trap, the system remains there. End of story. (92)

The direct policy implication of Prasch’s model is to set the minimum wage rate slightly above the “C Unstable” equilibrium. By setting the minimum wage above the “C Unstable” equilibrium, free market forces would then cause the wage rate to rise to the “B Stable” equilibrium. The final solution at B is ideal from the point of view of labour because it combines low hours of work and high wages. Prasch explains all of this on page 94 of his book:

The revised labor supply schedule implies a similar analysis in the event that a minimum wage is enacted. Consider…a minimum wage set just above wc. With such a mandated minimum wage, the quantity of labor demanded will be greater than the quantity supplied. The competitive process will then exert pressure on wages to rise until the market achieves the high wage/low hours equilibrium at point B. (94)

Concluding Remarks

Before we crack out the champagne to celebrate Prasch’s novel solution—basically a combination of free market forces and government intervention (i.e., the strategically set minimum wage) that interact in such a way to make the labour force substantially better off (i.e., the achievement of “B Stable” with high wages and low hours of work—I must caution that such approaches—both the earlier Kaleckian model with the two equilibria and the Prasch model with four equilibria–will be very hard to implement in the real world. This is because they involve the government to set the minimum wage at a sufficiently high level. I feel very uneasy about saying tersely: well, just get the government to solve the problem, lobby enough, set the minimum wage above wc and we can solve the labour problem! 

If only it were that easy. In particular, I am reminded of the famous 1943 paper by Michal Kalecki called Political Aspects of Full Employment, and his stern warning that:

In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. (5/9)

So part of the solution has not been provided yet—how do we “make it all work” especially if the government is probably going to take the side of the big business and rentier classes, in their attempt to prevent labour from achieving the “full employment” outcome. That will be the topic of a later article in which I will ponder some possible solutions to the implementation problem.