>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.
One advantage of inflation is that it allows for cuts in the real wage without changing the nominal wage. (Keynes was among the first to point this out, prompting Ernest Mandel to say something like "shrewd bourgeois that he was...") With inflation nearing zero, this becomes impossible - so employers would have to cut wages outright. To Greenspan, cutting the real wage will increase employment (simple supply/demand stuff) - but if it becomes impossible or difficult to cut the real wage, then unemployment will rise. There are a few problems with this: 1) higher wages don't necessarily result in lower employment, e.g. the empirical evidence on minimum wage increases, and 2) lower wages don't necessarily boost employment, if the net result is to decrease mass buying power. But it's always fun to catch a Fed chair talking about the need to cut wages.
Doug