In the previous chapter, it was suggested that neoclassical and Austrian economists essentially believed that unemployment varies directly with what was termed "the adjusted real wage." Increases in the adjusted real wage, other things equal, price some labor out of a job, increasing unemployment. It was further suggested that changes in any of the components of the adjusted real wage could change unemployment. Specifically, unemployment grows with increased money wages, but decreases with increased prices or productivity growth. We now proceed to examine the general validity of this neoclassical/Austrian perspective, and then comment on some general criticisms of the approach. In future chapters, we will analyze more closely the historical experiences that unfolded during the century.
In its simplest form, the hypothesized model is: