A New Macroeconomic Representation of the Labor Market based on the General Theory of the Firm

Based on the General Theory of the Firm, this paper has developed a new macroeconomic representation of labor market which allows to draw five main lessons. First, as an outcome of negotiations between employers and employees, the equilibrium of labor market is not characterized by equality between labor supply and labor demand, but rather by mutual « satisfaction » of both stakeholders. In fact, at the equilibrium, on the one hand, the respective desires to earn an extra penny on real gross profit and on real wage are equal and, on the other hand, the level of effort at work corresponds to the one agreed by each stakeholder in relation to the real wage. Secondly, labor demand is increasing with real gross profits. As a result, underemployment equilibrium is possible in an economy for two main reasons: (i) companies do not realize enough real profits to increase their labor demand, mainly because of the lack of profitable demand for goods and services and/or the strong job security in labor market; (ii) firms realize high real profits, but the labor flexibility is so strong that the economic dynamic is unfavorable for job creation and/or companies production capacities are relatively weak compared to labor supply. Thirdly, as a result, a judicious mix of flexibility and security in labor market, namely flexisecurity, is needed to ensure that economic growth generates both jobs and profits. Fourthly, the trade-off between unemployment and inflation is necessary in the short term, and the sacrifice rate of disinflation depends, among other things, on the degree of labor market flexibility. Lastly, even if a disinflation always has a cost in terms of the change in the unemployment rate in the short run, a decrease of the unemployment rate can be observed during a disinflation period.