A Fundamental Externality in the Labour Market? Ragnar Frisch on the Socially Optimal Amount of Work
41 Pages Posted: 26 Jan 2018 Last revised: 5 Feb 2018
Date Written: January 24, 2018
In the late 1940s, Ragnar Frisch published two articles in Norwegian that constitute a pioneering attempt to apply welfare economics to a problem of economic policy. The main contention of the articles is that there exists a fundamental externality in the labour market because the marginal productivity of labour depends both on input in the individual unit and on total labour use in the economy. While inspired by the problems of post‐war reconstruction, risch came to regard it as a general problem in a decentralized economy, and he explores its consequences for wage and tax policy. While Frisch attached great importance to the analysis, it has received little attention in the subsequent literature.
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