Wednesday, April 04, 2012

Wages, the depression and the EU crisis

Paul Krugman explains what economists call "downward nominal wage rigidity" in Screw Your Analysis to the Sticky Point 04/03/2012. It's also calls the stickiness of wages.

These observations have huge implications for policy. Let me stress two implications, in particular. This refers to the notion that even when unemployment rises, the wages of those working does not fall so quickly. Referencing a recent confirming study by the
San Francisco Federal Reserve, he makes two policy-related points:

1. The prevalence of zero-change wages constitutes overwhelming evidence that we're suffering from lack of demand, not lack of supply. It also undercuts one of the favorite arguments of those claiming that we really do have a supply-side problem, the persistence of (low) inflation and positive wage growth despite the low level of employment. The reason we have positive wage growth is that workers with a good bargaining position are still managing to eke out increases, while those without aren't facing wage cuts. ...

2. The stickiness of wages even in the United States — which has one of the most "flexible", aka brutal, labor markets in the advanced world, makes it clear just how huge the costs of the eurozone strategy of "internal devaluation" — getting wages down in peripheral economies, until competitiveness is regained — really is. By asking that Ireland, Spain, Portugal achieve double-digit falls in nominal wages, the Germans and the ECB are actually demanding something that basically never happens. [my emphasis]
Cartoonist Daniel Paz addresses the EU crisis this way in Página 12 this way:

International Monetary Fund Guy at Desk: If Europe falls, the United States will suffer the consequences.

Guy Standing: What? Are we going to apply our prescriptions to the United States?

The IMF is notorious for demanding that countries pursue privatization, austerity and generally Hebert Hoover economics. Also known (by me) as Angienomics, the kind of policies that German Chancellor Angela Merkel is imposing on the eurozone members. Britain isn't part of the eurozone, but Prime Minister David Cameron is apply Angienomics there, too.

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