the problem with low inflation - you can't cut wages easily!

Todd Archer todda39 at hotmail.com
Fri Dec 20 12:34:34 PST 2002


Doug posted:


>Another concern about deflation resides in labor markets. Some studies have
>suggested that nominal wages do not easily adjust downward. If lower price
>inflation is accompanied by lower average wage inflation, then the
>prevalence of nominal wages being constrained from falling could increase
>as price inflation moves toward or below zero. In these circumstances, the
>effective clearing of labor markets would be inhibited, with the
>consequence being higher rates of unemployment.

Doug, would you mind explaining this in simpler terms? I can't say as I follow the logic all the way through.

Todd

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