Re: German real wages in the Depression

[Gil Skillman <gskillman@xxxxxxxxxxxx>]

The Sandwichman writes:

> And if real wages fell to zero, there would be zero
> unemployment. Voila! BY DEFINITION, if there is
> unemployment, then real wages are higher than the
> market clearing level. What is this "market clearing
> level?" Why it's the level of wages at which there
> would supposedly be no unemployment. Don't these
> "economists" ever get embarrassed when somebody points
> out their "conclusion" does nothing more than restate
> their initial, fanciful assumption?


It is true that a *certain form* of unemployment, called "Keynesian" or (by
Keynes, for example) "involuntary," corresponds definitionally to a
situation in which real wages exceed their market-clearing levels (though
not all forms are due to this--e.g., unemployment due to job search).  But
there is less tautology here than meets the eye.  Edmond Malinvaud--an
economist--has demonstrated formally that in a situation of
downwardly-inflexible nominal wages and output prices, reducing nominal
wages by itself *increases* rather than *decreases* unemployment, by
disproportionately reducing aggregate demand for output and thus firms'
demand for labor.  The interesting question for the Fed study of the German
depression cited by Jim is whether it begs the scenario identified by
Malinvaud's analysis.  If you read the study, you'll see that there was in
fact output price deflation during the period studied (accounting for a
significant chunk of the increase in real wages identified by the authors),
so output prices were clearly not downwardly *rigid*, although they may
still not have been "market-clearing."  In any case, while there are
certainly grounds for criticizing the authors' conclusions, the study is
obviously not just an exercise in tautology.

Gil




> sam gindin wrote:
>
> > Of course, the increase in the 'real' part for those
> > working was coming from
> > the falling prices
> >
>
>
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