MONEY-WAGE DYNAMICS AND LABOR-MARKET EQUILIBRIUM The modal rationale for the simple Phillips-curve relation between wag change and the unemployment rate is that, at least in sectors or economies with little or no unionization, the unemployment rate is a good proxy for the excess-demand rate and that the latter largely explains wage move ments(apart from aggregation phenomena like changes in the employment mix).2 Even if excess demand were the sole determinant of wage changes this paper seeks to generalize that theory and to make it accommodate the infuence of expectations--it is not obvious that the unemployment rate is a good proxy for it. What if, at times, the vacancy rate in()enjoys a life of its own, moving independently of the unemployment rate?( I shall later discuss the evidence on this. Lipsey's paper (1960) brilliantly deduces from a model of employment dynamics a well-behaved relationship be- tween the vacancy rate(hence the excess-demand rate)and the steady unemployment rate. I shall show, however, using a similar model, that in the non-steady-state case the unemployment rate is an inadequate indicator of the excess-demand rate and that the rate of change of employment constitutes an essential additional indicator for inferring the excess-demand rate. 13 The excess-demand explanation of wage movements is unlike the law of ravity in that this explanation itself calls for an underlying explanation When we try to rationalize it, however, its restrictiveness becomes clear. It implies that a one-unit increase of the vacancy rate always has the same 12 The most extensive exposition is Lipsey' s (1960). In criticizing the reliance rate which this rationale promotes, Perry (1966) If the rate of wage change is proportional to the amount of excess demand which in turn is measured by unemployment, there is no room for other variables"(p. 22) believe his abandonment of the excess-demand theory on this ground was mistaken This paper adduces three explanatory variables from what is essentially an excess- demand theory. These two poi wing exercise Draw a non-negatively sloped labor supply curve and a non-positively sloped lat demand curve in the customary real wage-employment plane. Consider now the locus of points corresponding to a given unemployment rate; this iso-unemployment rate curve will lie to the left of the supply curve and will also be non- negatively sloped It is immediately obvious that if the demand curve is negatively sloped, or the supply positively sloped, then not all points on the locus represent equal algebra the demand curve, vacancies and excess demand increase despite constancy of the unemployment rate, Thus the latter is not - ssarily a sufficient proxy for excess rate constant, excess demand is decreasing in unemployment. The zero-vacancy, on-the-demand- curve case is a familiar example. This paper tries to get away from the supposition that we are always "on the demand curve, even t urve arising from excess supply in commodity markets. However, as we consider situations of higher vacancies, the unemployment rate unchanged we should expect the rate of increase of employment likewise to be nployers seek to reduce vacancies through grea tment. The t pieces of information-the unemployment rate he rate of increase of employ- ment--may together constitute a satisfactory proxy, or a better proxy, for excessMONEY-WAGE DYNAMICS AND LABOR-MARKET EQUILIBRIUM 685 The modal rationale for the simple Phillips-curve relation between wage change and the unemployment rate is that, at least in sectors or economies with little or no unionization, the unemployment rate is a good proxy for the excess-demand rate and that the latter largely explains wage move￾ments (apart from aggregation phenomena like changes in the employment mix).12 Even if excess demand were the sole determinant of wage changes￾this paper seeks to generalize that theory and to make it accommodate the influence of expectations-it is not obvious that the unemployment rate is a good proxy for it. What if, at times, the vacancy rate in (5) enjoys a life of its own, moving independently of the unemployment rate? (I shall later discuss the evidence on this.) Lipsey's paper (1960) brilliantly deduces from a model of employment dynamics a well-behaved relationship be￾tween the vacancy rate (hence the excess-demand rate) and the steady unemployment rate. I shall show, however, using a similar model, that in the non-steady-state case the unemployment rate is an inadequate indicator of the excess-demand rate and that the rate of change of employment constitutes an essential additional indicator for inferring the excess-demand rate.13 The excess-demand explanation of wage movements is unlike the law of gravity in that this explanation itself calls for an underlying explanation. When we try to rationalize it, however, its restrictiveness becomes clear. It implies that a one-unit increase of the vacancy rate always has the same The most extensive exposition is Lipsey's (1960). In criticizing the reliance solely on the unemployment rate which this rationale promotes, Perry (1966) wrote, "If the rate of wage change is proportional to the amount of excess demand which in turn is measured by unemployment, there is no room for other variables" (p 22). I believe his abandonment of the excess-demand theory on thisground was mistaken. This paper adduces three explanatory variables from what is essentially an excess￾demand theory. l3 These two points can perhaps be understood simply from the following exercise: Draw a non-negatively sloped labor supply curve and a non-positively sloped labor demand curve in the customary real wage-employment plane. Consider now the locus of points corresponding to a given unemployment rate; this iso-unemployment￾rate curve will lie to the left of the supply curve and will also be non-negatively sloped. It is immediately obvious that if the demand curve is negatively sloped, or the supply curve positively sloped, then not all points on the locus represent equal algebraic excess demand; in particular, as we move down this locus from its intersection with the demand curve, vacancies and excess demand increase despite constancy of the unemployment rate. Thus the latter is not necessarily a sufficient proxy for excess demand. (This demonstration in no way contradicts the proposition that, vacancy rate constant, excess demand is decreasing in unemployment. The zero-vacancy, on-the-demand-curve case is a familiar example. This paper tries to get away from the supposition that we are always "on the demand curve," even the Keynesian demand curve arising from excess supply in commodity markets.) However, as we consider situations of higher vacancies, the unemployment rate unchanged, we should expect the rate of increase of employment likewise to be higher as employers seek to reduce vacancies through greater recruitment. The two pieces of information-the unemployment rate, and the rate of increase of employ￾ment-may together constitute a satisfactory proxy, or a better proxy, for excess demand