Friday, December 27, 2013

Left-Wing Confusion About Monetary Policy & Real Wages

Recently, several left-wing pundits have argued that an [even more] inflationary monetary policy is needed to boost real wages. Their argument is that an even more inflationary monetary policy would reduce unemployment and a lower unemployment rate would improve worker's bargaining power relative to employees.

What they forget is that the way more inflation reduces unemployment is by reducing real wages given a situation of nominal wage rigidity.

Arguing that inflation is needed to boost real wages is like arguing that in order to raise margins, retailers need to reduce them!

If real wages/margins are further depressed, then this would indeed improve the prospect of recovery from those depressed levels, but the end result at best is no better than if there had been no lowering in the first place, but most likely the end result would mean even lower values than otherwise.


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