Thursday, September 15, 2011

Inflation Reduces Real Wages

Matthew Yglesias wants more inflationary policies to increase real wages. That's like starting a fire to make things cooler.

The Fed last year did pursue the kind of policy Yglesias wanted (QE2). That was indeed successful in increasing inflation, as consumer price inflation rose from 1.2% in August 2010 to 3.8% in August 2011 . But as the nominal increase in hourly earnings was basically unchanged, this lowered the change in real hourly earnings from 0.7% to -1.9%.

This is a very expected outcome considering that wages are more sticky than most prices, particularly food and energy prices.


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