Keynes scrutinizes the notion that reducing money-wages automatically boosts employment—a cornerstone of classical economic theory. He argues that this classical view rests on the erroneous assumption that a decrease in wage rates always makes production cheaper, raises profits, and thus incentivizes businesses to employ more labor. In fact, for the community as a whole, a wage reduction does not necessarily lift effective demand. Keynes clarifies that the total volume of employment depends uniquely on the level of aggregate demand (i.e., consumption plus investment), so any alteration in money-wages must be examined through its repercussions on consumption behavior, the marginal efficiency of capital, and the interest rate.

He identifies seven possible routes by which lower money-wages could affect output—such as redistributing purchasing power or impacting liquidity preference—but emphasizes there is no guarantee that net effects will spur overall employment. For instance, lowered wages can reduce workers’ spending power, diminish confidence, and raise the real burden of debt, offsetting any cost advantage to employers.

Further, Keynes contrasts a strategy of wage reductions with the alternative of expanding the money supply. Although each approach theoretically lowers the “real wage” in different ways, increasing the money supply is simpler and avoids the intense social frictions (and potential collapses in confidence) triggered by wage cuts.