Article;
Unemployment in Europe is Expected to Worsen
Comment;
If unemployment
is high in Europe we need to cut down wages in order to boost demand for labor.
Wages should fall in order to clear the labor market. Atleast this is what the
market clearing prices suggest. But real wages are already low compared with
productivity levels like the US. Prices are coming down and inflation targeting
seems to be not working because price-stability is the stated objective. Prices
depend upon the demand level which is seemed to be low, and, demand is also
dependent on prices, low prices high demand and high prices low demand. Europe
is in a strange situation, at one place it needs to cut down nominal wages so
the people are hired and at the other we need higher real wages so the demand
is created. How we can achieve this is important… We can achieve a rise in real
wages and at the same time a cut down in nominal wages through internal
devaluation and deflation. What we need to do is to let the prices slide downwards
which will also reduce nominal wages but nominal wages can not go below real
wages due to downward wage rigidity and let the real wages rise when prices are
falling. Real wages will rise if prices go down and nominal wages will go down
if prices go down. Nominal wage equals real-wage plus inflation. When inflation
will go down nominal wages will go down and real wages will rise…
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