Lower Wages will Lead to Low Demand and Over-Supply...

When inflation goes up wages go up and when it goes down wages go down, too. The same with productivity; if productivity goes up wages should go up and vice-versa. Changes in wages affect the level of demand within the economy and the US and Europe is suffering from lack of demand. It is all about expectations. When people expect inflation they demand higher wages and when inflation goes down the market cuts wages. But they (wages) can not go below a certain level called subsistence wages  

Wages can increase in two ways; a) rise in real wages (when inflation goes down) and (b) rise in nominal wages, as normally happens. Real wages rise in real terms when the economy is going through a recession and deflation sets in and fall when economy expands and productivity increases and wages do not increase in comparison because the Capitalists want to contain the cost. There is a constant tussle between the Capitalist and laborers for wages. The Capitalist want lower wages and the laborers want higher wages. If we look at the comparison of wages and productivity in the US we find that productivity increased at a higher pace than wages that has made the demand of the economy lagging behind the actual goods and services which can be produced and consumed. And whenever this thing happens prices will fall and deflation will set in because supply will be high and demand will be low. Means over-supply.

As far as productivity and wages are concerned you will notice that productivity and wages increased significantly in China than rest of the world and the economy is flourishing. Wages and incomes are an important determinant of demand and health of an economy and China is doing much better. Otherwise economy will be stuck at low levels of per-capita income and over-supply. People must have money in order to buy the goods and services produced within the economy…