No it isn't the "right way" to analyse things because monetary policy does not directly determine prices which are determined in markets. Monetary policy works through effects on aggregate demand. Raising interest rates suppress investment, perhaps encouraging savings a bit and contracting aggregate demand. That will lead to reduced output prices, but also lower demand for labour, reduced employment and more firm/householder bankruptcies. There will be either be downward pressure on real wages as a consequence of less demand (not your stated objective) or, if nominal wages are sticky, rising unemployment.
We should seek to minimise such events by not setting into play (or minimising) the circumstances that make such monetary policy actions necessary.
"I really have no idea what you are trying to say here."
I re-read what I wrote and think it is both explicit and relevant to your argument. Your concern is with declining real wages and my argument is that this is at least partially an endogenous response to events in the economy rather than tribunal decisions. You can control W but not W/P which is partly determined once firms make price adjustments following nominal wage increases and when higher nominal wages bid up prices. I also claimed you were confusing moral judgements on desired wages with positive analysis of the effects of nominal wage increases, a positive issue.
So, if wage policy can control W, and monetary policy can control P, where's the problem with W/P? (Not suggesting this is the right way to analyse things, just asking how inflation targeting fits into your story(>
You treat the level of real wages as a controllable policy variable. Nominal wages W are partially controllable through our somewhat centralised wage-setting system. But real wages which are W/P where P is the price level is not so obviously even partially controllable. We do not have widespread price controls in our economy and prices are set by individual firms who will account for wage costs when they set prices. In the short run W/P might be able to be set if prices are sticky but after a year or so this will not be the case. This error leads you into treating the level of real wages as a target variable which can be determined on the basis of moral considerations. it isn't. It's an equilibrium outcome in the economy and it makes no more sense to say that the real economic problem is that real GDP per capita is not 25% higher than it is. Government may influence real wage and production levels in an economy but these are largely uncontrollable outside of centrally planned economies.
Even if real wages could be somehow set (it can't) there would be an "instrument problem" of choose either to set the level of real wages or the level of employment/unemployment. This is because there is a downward-sloping demand for labour and you can only set real wages which yields a point on this schedule if you give up control over the gap between the demand for labour and its supply. Even you cannot cancel the law of supply and demand.
If you still believe the preposterous Card/Krueger fiction that minimum real wages have no impact on the demand for unskilled labour you need to see some of the recent surveys
Real wages do drive labour demands particularly among the young and unskilled where unemployment is most likely to be concentrated.
To summarise: It is questionable whether you can sensibly target the real wage because it is an endogenous economic variable. Yes, you can set nominal wages but labour is a large component of costs and firms will adjust their prices to reflect nominal wage increases. Even if you could set real wages you might not want to do so because you can only pursue such objectives by sacrificing jobs among the unskilled and the young.
All this is completely separate from the moral issue of whether "wages are too low". You can agree with the latter but still regard the problem of low wages as something beyond the control of government except, perhaps, through longer-term training and education policies.
No mention at all of the Reserve Bank and inflation targeting, which is the main subject of the article. I really have no idea what you are trying to say here.
And, if you want to convince me that Card and Krueger have been generally rejected, I suggest linking to someone other than Neumark, who has been their leading critic from Day 1.
Thanks John -all very interesting! Inflation needn’t be such a bad think for people like me and many other carrying a heavy debt burden. But unless wages keep pace with inflation, the magic of debt-deflation won’t be the same. We’ll just be paying a greater proportion of our income to service our mortgages, placing further pressure on our already declining living standards. Ah well, as Thucydides said “the weak must suffer what they must.”
No it isn't the "right way" to analyse things because monetary policy does not directly determine prices which are determined in markets. Monetary policy works through effects on aggregate demand. Raising interest rates suppress investment, perhaps encouraging savings a bit and contracting aggregate demand. That will lead to reduced output prices, but also lower demand for labour, reduced employment and more firm/householder bankruptcies. There will be either be downward pressure on real wages as a consequence of less demand (not your stated objective) or, if nominal wages are sticky, rising unemployment.
We should seek to minimise such events by not setting into play (or minimising) the circumstances that make such monetary policy actions necessary.
"I really have no idea what you are trying to say here."
I re-read what I wrote and think it is both explicit and relevant to your argument. Your concern is with declining real wages and my argument is that this is at least partially an endogenous response to events in the economy rather than tribunal decisions. You can control W but not W/P which is partly determined once firms make price adjustments following nominal wage increases and when higher nominal wages bid up prices. I also claimed you were confusing moral judgements on desired wages with positive analysis of the effects of nominal wage increases, a positive issue.
That's clear enough.
So, if wage policy can control W, and monetary policy can control P, where's the problem with W/P? (Not suggesting this is the right way to analyse things, just asking how inflation targeting fits into your story(>
You treat the level of real wages as a controllable policy variable. Nominal wages W are partially controllable through our somewhat centralised wage-setting system. But real wages which are W/P where P is the price level is not so obviously even partially controllable. We do not have widespread price controls in our economy and prices are set by individual firms who will account for wage costs when they set prices. In the short run W/P might be able to be set if prices are sticky but after a year or so this will not be the case. This error leads you into treating the level of real wages as a target variable which can be determined on the basis of moral considerations. it isn't. It's an equilibrium outcome in the economy and it makes no more sense to say that the real economic problem is that real GDP per capita is not 25% higher than it is. Government may influence real wage and production levels in an economy but these are largely uncontrollable outside of centrally planned economies.
Even if real wages could be somehow set (it can't) there would be an "instrument problem" of choose either to set the level of real wages or the level of employment/unemployment. This is because there is a downward-sloping demand for labour and you can only set real wages which yields a point on this schedule if you give up control over the gap between the demand for labour and its supply. Even you cannot cancel the law of supply and demand.
If you still believe the preposterous Card/Krueger fiction that minimum real wages have no impact on the demand for unskilled labour you need to see some of the recent surveys
https://onlinelibrary.wiley.com/doi/10.1111/irel.12306.
Real wages do drive labour demands particularly among the young and unskilled where unemployment is most likely to be concentrated.
To summarise: It is questionable whether you can sensibly target the real wage because it is an endogenous economic variable. Yes, you can set nominal wages but labour is a large component of costs and firms will adjust their prices to reflect nominal wage increases. Even if you could set real wages you might not want to do so because you can only pursue such objectives by sacrificing jobs among the unskilled and the young.
All this is completely separate from the moral issue of whether "wages are too low". You can agree with the latter but still regard the problem of low wages as something beyond the control of government except, perhaps, through longer-term training and education policies.
No mention at all of the Reserve Bank and inflation targeting, which is the main subject of the article. I really have no idea what you are trying to say here.
And, if you want to convince me that Card and Krueger have been generally rejected, I suggest linking to someone other than Neumark, who has been their leading critic from Day 1.
Thanks John -all very interesting! Inflation needn’t be such a bad think for people like me and many other carrying a heavy debt burden. But unless wages keep pace with inflation, the magic of debt-deflation won’t be the same. We’ll just be paying a greater proportion of our income to service our mortgages, placing further pressure on our already declining living standards. Ah well, as Thucydides said “the weak must suffer what they must.”