One way to contain compensation is for the central bank to raise interest rates when inflation starts to build. The logic is that increasing unemployment will moderate pay pressures and also discourage business from giving employers pay increases in excess of productivity gains. Ironically, quite a few “free markets” supporters endorse this type of intervention to correct a perceived marker failure (labor having undue bargaining power) but reject a raft of others.
One of the hard things about free markets is that everybody seems to want to meddle with at least one small portion that they see as problematic. However, if you are not careful you can end up with unexpected consequences as markets respond to incentives in unexpected ways. This is not to say that inflation is a good thing (it isn’t) but rather to recognize that real markets have limitations and failures.
This example is particularly interesting as one of the great issues of the moment is how powerless workers have become in the face of tight credit markets.
"This is not to say that inflation is a good thing (it isn’t) "ReplyDelete
Like many things, a little is probably a good thing. And it's certainly better than deflation.
Mark: I agree. I was more thinking that it seemed to be odd to worry that workers might have too much bargaining power and so we need to develop policy deliberately to reduce that. There is an argument that this might be worth it to prevent rampant hyper-inflation but I liked the obsevation that we don't do this in other contexts (like when CEOs might have too much bargqaining power).ReplyDelete
The point about inflation was secondary; what you just said about the imbalance of power was definitely on target.ReplyDelete
For a related discussion, check out this post from Thoma: