Intervening Variables in Economics: An Explanation of Wage Behavior

Part of the Recent Economic Thought Series book series (RETH, volume 13)


Wage behavior lies at the heart of two of the most pressing problems facing economists at the present time: inflation and unemployment. It is now clear that the control of inflation cannot be viewed simply as a matter of controlling the money supply. Ultimately, we must grapple with the fundamental forces at work in societies, and many of these, as we should expect when dealing with human beings, are of a psychological nature. This chapter argues that intervening variables must be accorded a more central role in economics. In this chapter it is demonstrated how they may help improve our understanding of the forces generating inflation. Similarly, using this broader approach to economics we can hope to gain valuable insights into the reasons for wage “stickiness,” and therefore into the reasons why the labor market may not clear, even in the long run. Keynes (see Trevithick, 1976), Tobin (1972), Solow (1979), and numerous others have stressed the importance of pay comparisons in explaining the downward stickiness of wages, but their views have still failed to gain general acceptance. The problem, it seems, is the lack of convincing microfoundations for these ideas. This chapter advances some proposals for filling this gap.


Labor Market Reference Group Relative Deprivation Absolute Income Psychological Economic 
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  1. 2.
    In this latter case, hierarchical wants would not have to imply an absence of substitution between goods as relative prices changed — see Earl (1983a, chapter 6).Google Scholar
  2. 3.
    The attempt by Rawls (1971) to devise acceptable criteria has been widely discussed without, however, any consensus emerging. An outlineof his approach is given in Baxter (1973).Google Scholar

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© Kluwer Academic Publishers, Boston 1988

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