Stabilizing the Macroeconomy with Labor Market Policies*

This paper argues that active labor market policies such as work sharing programs should be implemented to stabilize the Korean economy. Using a two-sector post-Keynesian model consisting of manufacturing and services, we identified three directions for labor market policy applicable during a crisis. Under a wage-led demand system with a Keynesian stability condition satisfied, government can reduce the wage gap between the manufacturing and service sectors. Under a profit-led demand regime with the Keynesian stability, it is possible to implement a work sharing program centered on manufacturing. If Harrodian instability exists, the simultaneous adjustment of both wages and working hours focused on manufacturing can be considered. The last direction may be suitable for the Korean economy since the stabilizing forces taming Harrodian instability, such as exports and government expenditure, became less autonomous after the 2008 global financial crisis.