Sticky Wages and “Living Standards”
Why does employment fall when there is a negative shock to aggregate demand? Because nominal wages are sticky. Why does employment rise when there is a positive shock to aggregate demand? Because nominal wages are sticky.
Labour and HM Treasury are arguing about whether British living standards are rising based on some measure of real wages, and I find this very annoying.
The phrase “cost of living crisis” is still stupid. Labour spent most of the last three years arguing that the government should be doing more aggressive demand stimulus. Well, guess what the effect of faster AD growth would be, Dear Eds? That’s right, an even faster rise in the “cost of living”. And because nominal wages are sticky that would mean even lower real wages… oh and hopefully, even higher employment. That is the point in doing demand stimulus.
That’s what Abenomics is trying to achieve in Japan, following bog standard New Keynesian macro policy for the ZLB. That’s what happened when FDR and Chamberlain left the gold standard in the 1930s, it raised “the cost of living.” The reason “Old New Keynesians” argue we need fiscal stimulus at the ZLB is to “create inflationary pressure” because you think you monetary policy can’t “get traction”. Yet the Two Eds are arguing UK has “too much inflationary pressure” even WITHOUT fiscal stimulus… so just what was the point of all those “too far, too fast” arguments? Why does anybody still take this garbage seriously?
And HM Treasury’s argument that we should look at real wages to see whether living standards are rising is just as stupid. Almost any available measure of real wages rose in 2009… so was that good for “hardworking people” (™ The Tory Party)? Only if you ignore the inconvenient fact that a million people discovered they were suddenly unable to work at all, whether “hard” or not.
This data is sufficient to demonstrate, in my view, that “living standards” are rising:
Now enough stupid arguments, and get people back to work.