Saturday, April 02, 2011

Real Wages: Ends & Means

It might be confusing to some that seemingly discuss real wage cuts as something positive here, yet describe it as negative here. Isn't that inconsistent?

No, because in the first post I described it in terms of being a mean to reduce unemployment, in the other I described it in terms of being an end result given a certain level of employment.

Or in other words, in the first post I described the causal effect of real wage cuts in periods of high unemployment, in the second I described it as an end result given a certain level of employment.

As an end result, lower real wages is something negative. Just about everyone wants their real pay to increase, and not decrease, so all else being equal, lower real wages is something negative.

However, most people would also view being unemployed as being even worse than being employed at a lower real pay, and because lower real wages can reduce unemployment if unemployment was high initially, lower real wages is arguably a lesser evil compared to high unemployment. It is however still a negative, so given a certain level of unemployment and employment, news of lower real wages are bad news.