The Aggregation Problem in the Employment Theory: The Representative Individual Model or Individual Employees Model?

Masayuki Otaki

Institute of Social Science, University of Tokyo, Tokyo, Japan.

DOI: 10.4236/tel.[phone]                

Abstract

Employment theory does lacks a consensus concerning whether employment variation should be expressed as a change in the hours worked as a representative individual or as a change in the population of employed individuals. By appling the OLG model developed by Lucas [1] and Otaki ([2-4]), the present article describes a serious theoretical conesquence of distinction. The crucial factor that different employment theories are the intertemporal substitution effect and the indivisibility of labor force. Monetary expansion increases the rate of return for money if it is credible in the sense of Otaki [5]. This enhances the hours worked in the representative individual model, and thus, aggregate supply causes demand. Conversely, in the indivisible employees model, such an intertemporal substitution effect does not exist. The monetary expansion directly improves the purchasing power of money and thereby increases the aggregate demand for goods by the older generation. Thus, demand derives supply.

Keywords

Representative Individual; Indivisible Labor Supply; Intertemporal Substitution; Credibility of Money; Fiscal Multiplier

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	R. E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124. doi:10.1016/0022-0531(72)90142-1
[2]	M. Otaki, “The Dyanamically Extended Keynesian Cross and the Welfare-Improving Fiscal Policy,” Economics Letters, Vol. 96, No. 1, 2007, pp. 23-29. doi:10.1016/j.econlet.2006.12.005
[3]	M. Otaki, “A Welfare Economic Foundation for the Full Employment Policy,” Economics Letters, Vol. 102, No. 1, 2009, pp. 1-3. doi:10.1016/j.econlet.2008.08.003
[4]	M. Otaki, “The Role of Money: Credible Asset or Numeraire?” Theoretical Economics Letters, Vol. 2, No. 2, 2012, pp. 180-182. doi:10.4236/tel.[phone]
[5]	M. Otaki, “A Pure Theory of Aggregate Price Determination,” Theoretical Economics Letters, Vol. 1, No. 3, 2011, pp. 122-128. doi:10.4236/tel.[phone]
[6]	J. M. Keynes, “The General Theory of Employment, Interest and Money,” Macmillan, London, 1936.
[7]	K. Fukao and M. Otaki, “Accumulation of Human Capital and the Business Cycle,” Journal of Political Economy Vol. 101, No. 1, 1993, pp. 72-99. doi:10.1086/261866