According to Keynes employment depends upon ED. and it depends upon four factors:
(1) Propensity to Consume
(2) Marginal Efficiency of Capital
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(3) Rate of Interest
(4) Public Debet.
If the cut in money wages favourably affect the above determinants of employment then it would be appropriate to follow the classical view point. To Keynes, the money wage cut affect the above determinants of ED unfavourably.
Factors
1. Propensity to consume:
Prof. Pigou was of the opinion that money wage-cut will increase propensity to consume. His view is based on the arguments that prices will fall with fall in money wages.
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Consequently, the owner of liquid assets will become rich due to increase in the value of their liquid assets. They will increase their consumption.
But Pigou Effect is not strong enough because majority of people do not possess liquid assets. Those who have liquid assets their propensity to save is more and they will not increase their consumption.
According to Keynes, the income of workers, whose propensity to consume is high, will fall. On the other hand with the fall in money wages the income of rich class, whose propensity to consume is law will increase.
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Hence, the net effect of cut in money wages will be that overall propensity to consume is the economy will fall.
The ‘Keynesian effect’ is stronger than ‘Pigou Effect’. Thus cut in money wages will adversely affect the propensity to consume.
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2. Marginal efficiency of capital:
Decrease in money wages can affect MEC favourably only when wages are reduced once and not further. But it does not happen in capitalist economies.
According to Keynes workers will oppose any cut in their money wages. Workers opposition will create industrial unrest in the economy.
Industrial unrest will vitiate investment environment in the economy and this will affect MEC unfavourably.
3. Rate of interest:
Cut in money wages reduces the price level. The demand of money for transaction motive will fall.
Therefore, it can be said that rate of interest may fall with fall in money wages. But Keynes was of the view that rate of interest can be reduced by increasing money supply and at the same time there will not be any opposition of workers to it.
4. Public debt:
The cut in money wages will adversely affect private and public investment. If the general price-level falls with fall in money wage, the real burden of public debt will increase.
Consequently, government will impose additional taxes to redeem public debt. The burden of additional taxes would adversely affect both investment and propensity to consume. Thus, employment would be adversely affected.