04 February 2009

Wage Policy v. Monetary Policy

There is plenty more in Hayek's essay Can We Still Avoid Inflation? about the effect of wage policy on monetary and fiscal policy in an effort to keep unemployment low. Without posting here multiple long paragraphs I want to share a few key points.
[There are policies and laws] which in effect release unions of all responsibility for the unemployment their wage policies may cause and place all responsibility for the preservation of full employment on the monetary and fiscal authorities...

Since it cannot be denied that at least for a period of years the monetary authorities have the power by sufficient inflation to secure a high level of employment, they will be forced by public opinion to use that instrument...

[Inflationary developments] will continue to operate as long as we allow on the one hand the unions to drive up money wages to whatever level they can get employers to consent to-and these employers consent to money wages with a present buying power which they can accept only because they know the monetary authorities will partly undo the harm by lowering the purchasing power of money and thereby also the real equivalent of the agreed money wages.

I see all of this as a vicious cycle that can only be broken by breaking a large number of people. Either workers must be willing to periodically take wide spread cuts in pay, companies must risk labor conflicts by not agreeing to unreasonable wage policies, or monetary officials (i.e. our government) must dispel the myth that unemployment can be held low indefinitely and risk the wrath of their constituents.

I often try to apply personal financial principles to macroeconomics and the economy as a whole, and I am beginning to realize how quickly this can fall apart. The simple desire to provide well for your family and ensure a good wage can lead to a chain of decisions that leaves the entire economy in need of a painful correction due to misappropriated capital.

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