Economics Questions

Re: Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

mahsah — Tue, 27 Apr 2010 18:03:06 GMT

Thanks for the reply. I'm still new to Economics so I haven't read the "General Theory" yet (Its pretty low on my reading list...)

Also obviously it has drawbacks in the economy at large, I was just wondering if one of the so called benefits of inflation was just monetary policy counteracting fiscal policy. Thanks for your input, I'll go look into it some more.

Re: Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

Smiling Dave — Tue, 27 Apr 2010 16:50:17 GMT

"It seems like such an obvious connection at first blush, but I haven't been able to find anything on it."

Now you mention it, this idea is mentioned early on in Keynes' book. He was talking about unemployment caused by unions refusing to accept lower wages, even though the economy was in a sad state and wages had to go down. His solution? Trick the unions by inflating the money supply. That way they will get a lower real wage, but will be too stupid to realize it. Problem solved.

I don't think he was criticized for the logic of this solution. The objection I remember is that unions know all about inflation and will want to protect their real wages too.

So yeah, your reasoning sounds right. Of course it's a high price EVERYBODY ELSE has pay. All the dollars that anyone in the whole world has will be worth less. They were not asked if they want this to happen, which of course they don't.

Re: Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

mahsah — Tue, 27 Apr 2010 16:27:41 GMT

Bumping this because I'm still really interested in people's opinions on this. It seems like such an obvious connection at first blush, but I haven't been able to find anything on it.

Re: Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

Caley McKibbin — Wed, 21 Apr 2010 01:11:19 GMT

Meanwhile, the price ceilings on products, such as rental housing, makes them continuously less profitable until everyone goes out of business and all of the workers get laid off, increasing unemployment.

Re: Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

Smiling Dave — Wed, 21 Apr 2010 00:41:58 GMT

I like it.

BTW there is a video here somewhere showing how the phillips curve is closer to voodoo than economics. Maybe someone remembers which it is. Its by a young economist.

And of course we had stagflation under Nixon.

Inflation v. Unemployment "tradeoff" and Minimum Wage/Unions?

mahsah — Wed, 21 Apr 2010 00:25:29 GMT

Hello, I'm still a bit new to economics but I was wondering if anyone had any ideas or comments about this question/idea:

According to the Phillips Curve, there is an inverse relationship relationship between Unemployment and Inflation. I had a somewhat crazy thought of what could explain this: What if this was because of the minimum wage and/or Unions (or any other coersion causing wages higher than the equilibrium).

For example, lets say that in a free market the equilibrium price for labor is $3.5, but the minimum wage is $7. The government doubles the money supply, but the minimum wage or wages set by union contracts do not rise immediately. Thus, the equilibrium price for labor would rise to $7 because the dollar is worth less, and the price floor would become nonbinding for many firms. As a result of this the firms would be able to hire more people, decreasing unemployment. Inflation in this case acts as a counter to minimum wage.

Anyway, I appreciate comments and/or flames about this idea, I just came up with it on a whim today :)