It’s government that gums up markets
October 14th, 2009 by Philip BoothAccording to Keynes, sticky prices in markets lead to a phenomenon whereby we can get disequilibrium in the labour market unless the government intervenes to prevent deflation. As ever, all the evidence seems to point in the direction of stickiness being imposed by government. Government then looks for some work for itself, deciding to intervene to overcome the problems it has itself created.
In a situation of deflation and when labour markets are slack, we need nominal wages to fall. That they do not do so more rapidly in the private sector is, in part, due to certain aspects of labour market regulation that prevent employers changing wages easily. However, that is not the main problem. In the private sector, employers can overcome such obstacles put in their way by government one way or another. And the residual stickiness that results is nothing compared with the problems created by government in respect of its own dealings. Consider the following:
1. Public sector wages are rising rapidly whilst private sector wages are stagnant or falling.
2. Amazingly, the government intends to increase pensions by 2.5% – a real terms increase of over 4.2% (when the economy has shrunk by 4%).
3. The minimum wage has gone up this month from £5.73 to £5.80 per hour (for workers aged over 21).
4. Social security benefits are underpinned in nominal terms so, given that the price level has fallen, social security benefits will go up in real terms by about 1.7% – again at a time when the economy is shrinking.
What causes nominal stickiness – markets or governments?
October 14th, 2009 at 11:24 am
When I wrote a book on inflation accounting (called ‘On A Cloth Untrue’),I thought of asking the publishers to price it in ‘real’ terms, so that the nominal price would increase every month in line with the Retail Prices Index. Of course that was only a thought: it would hardly have been practicable!
And anyway, why should prices stay constant even in real terms?
Of course there is the convenience argument, that one doesn’t want prices always to be jumping about all over the place. And prices aren’t the only variable — aspects of ‘quality’ may change too.
But perhaps more markets should be like the foreign exchange markets, where fluctuations in price are readily accepted.
October 15th, 2009 at 11:19 am
Governments.
You should elaborate on point 4; people calculate that a single person would need to earn £15,000 a year to be better off in benefits than in work (assuming they’re getting full housing/council tax benefit). This sets an even higher floor than the (pointless) NMW, as does the close-to100% marginal tax/benefit withdrawal rate.
October 15th, 2009 at 12:04 pm
To follow up on Mark’s point, a lot depends on housing costs. Outside London the rent for a one-bedroom social-sector flat is often as little as £55 per week, while in the private sector, even in London it is possible to rent a room in a house share for £65 per week. At these rent levels a person will still be better off in full-time work at the NMW (assuming travel costs are not too prohibitive), so the minimum wage can still have an effect. Of course, many younger people live with their parents, while a high proportion of older IB claimants are owner-occupiers – in these cases the dead hand of housing benefit may have no effect.