JOURNAL OF POLITICAL ECONOMY wage effect as a one-unit decrease of the unemployment rate. Second, the excess-demand theory implies that most of the time, in the neighborhood of"equilibrium"(see Part IID), vacancies will equal unemployment and that a disequilibrium rise of wage rates red employment. That vacancies almost never exceed unemployment may be due in part to the behavior of unions, as conceded earlier, and in part to the existence of"unemployables"and the resistence to money-wage cuts in sectors and trades where the market calls for them. But I suspect that a part of the reason is the of the theory of money-wage movements, one which is less restrictive than the simple excess-demand theory but which admits it as a special case. Ele- ments of this approach have previously been discussed by James duesen- berrys(1958, pp. 300-9). Until Part lll, where expectatic I hold constant the rate at which each firm expects other firms to change over time the wage they pay their labor. For ease of exposition, it is as- sumed simply that each firm expects the wage paid elsewhere to be constan for the near future An important element of this theory is the cost to the firm of its"turn- over rate. Given a constant differential between the firms wage rate and the wage rates paid by other firms, a fall of the unemployment rate will tend to increase the quit rate experienced by the firm. Unless the firms employment was excessive to begin with, the increase of its quit rate will impose costs: The firm must either allow its output to decrease, thus losing profits, or incur the recruitment, processing, and training costs of replacing the departing workers (or choose some combination of these two losses) At a sufficiently high quit rate corresponding to a low unemployment rate, the firm will want to increase the differential between the wage it pays and the average wage paid elsewhere, on the ground that the savings from lower turnover costs will more than pay for the extra wage bill. As all firms attempt to raise this differential, the general wage index rises. 16(The theory will Is well: There presumably exists a sufficiently high un- employment rate such that the quit rate is low enough to induce the firm to unemployment in this theory stems from its effect upon quit rates rather than from any supposed underbidding for jobs by unemployed workers loubtedly job vacancies also play a part. First of all, the qu may depend upon both the unemployment rate and the vacancy rate since A ROss(1966, p. 98) reports American eider yment versation on ubject with Professor Duesen berry, but he is not iations and on my part. 6 For impressive of this part of the theory, see Eagly (1965)686 JOURNAL OF POLITICAL ECONOMY wage effect as a one-unit decrease of the unemployment rate. Second, the excess-demand theory implies that most of the time, in the neighborhood of "equilibrium" (see Part III), vacancies will equal unemployment and that a disequilibrium rise of wage rates requires vacancies to exceed un￾employment. That vacancies almost never exceed unemployment14 may be due in part to the behavior of unions, as conceded earlier, and in part to the existence of "unemployables" and the resistence to money-wage cuts in sectors and trades where the market calls for them. But I suspect that a part of the reason is the inaccuracy of the excess-demand theory on its own terms. I shall now describe and try to rationalize a generalized excess-demand theory of money-wage movements, one which is less restrictive than the simple excess-demand theory but which admits it as a special case. Ele￾ments of this approach have previously been discussed by James Duesen￾berry15 (1958, pp. 300-9). Until Part 111, where expectations are introduced, I hold constant the rate at which each firm expects other firms to change over time the wage they pay their labor. For ease of exposition, it is as￾sumed simply that each firm expects the wage paid elsewhere to be constant for the near future. An important element of this theory is the cost to the firm of its "turn￾over rate." Given a constant differential between the firm's wage rate and the wage rates paid by other firms, a fall of the unemployment rate will tend to increase the quit rate experienced by the firm. Unless the firm's employment was excessive to begin with, the increase of its quit rate will impose costs : The firm must either allow its output to decrease, thus losing profits, or incur the recruitment, processing, and training costs of replacing the departing workers (or choose some combination of these two losses). At a sufficiently high quit rate corresponding to a low unemployment rate, the firm will want to increase the differential between the wage it pays and the average wage paid elsewhere, on the ground that the savings from lower turnover costs will more than pay for the extra wage bill. As all firms attempt to raise this differential, the general wage index rises.16 (The theory will work in reverse as well: There presumably exists a sufficiently high un￾employment rate such that the quit rate is low enough to induce the firm to want to pay a wage below that paid by others on the ground that the wage savings will more than pay for the extra turnover costs.) Thus one role of unemployment in this theory stems from its effect upon quit rates rather than from any supposed underbidding for jobs by unemployed workers. Undoubtedly job vacancies also play a part. First of all, the quit rate may depend upon both the unemployment rate and the vacancy rate since l4 ROSS (1966, p. 98) reports American evidence that only at an unemployment rate as low as 2.5 per cent does the vacancy rate equal the unemployment rate. l5 I have also benefited from a conversation on this subject with Professor Duesen￾berry, but he is not responsible for deviations and errors on my part. '"or impressive empirical support of this part of the theory, see Eagly (1965)