- 15 Sep 2021 04:52
#15190493
Some economists point out that the problem with trying to increase wages is that it will increase prices and cause inflation.
It is true that higher wages lead to higher prices. However, when this happens usually wages increase by a percentage greater than that of the price increases.
This is especially true if we are talking about adding to wages within the country's economy that otherwise would have not been spent there, and spent in another country.
This is one of the reasons why rising wages is a little bit of a problematic way to deal with inflation. What I mean is if you have a certain amount of inflation, caused by something else, and then wage levels rise to be equal with that level of inflation, then that will end up causing some more inflation, and then wages will have to rise even a little more to meet it.
This of course doesn't go on forever, but will establish some equilibrium point after a short period of time.
You can try to look at this mathematically and that may help understand the concept of what is going on here.
first inflation + inflation caused by wages = final inflation
final inflation (x) a certain constant = inflation caused by wages
Then you can use some linear algebra and substitution
The phenomena of what is going on is also similar to the infinite sum theorem, where wage increases keep leading to price increases, which keep leading to more wage increases, but incrementally less and less, until they establish themselves moving towards some final stable point.
Let's say that for every $2 in wage increases it leads to $1 in price increases.
If you start inflation off at 4%, then the additional inflation caused by wage increases would also be 4%, leading to a final 8% total inflation rate with an 8% increase in wages.
(1/2 + 1/4 + 1/8 + 1/16 etc) times the original 4% will be the additional increase
It is true that higher wages lead to higher prices. However, when this happens usually wages increase by a percentage greater than that of the price increases.
This is especially true if we are talking about adding to wages within the country's economy that otherwise would have not been spent there, and spent in another country.
This is one of the reasons why rising wages is a little bit of a problematic way to deal with inflation. What I mean is if you have a certain amount of inflation, caused by something else, and then wage levels rise to be equal with that level of inflation, then that will end up causing some more inflation, and then wages will have to rise even a little more to meet it.
This of course doesn't go on forever, but will establish some equilibrium point after a short period of time.
You can try to look at this mathematically and that may help understand the concept of what is going on here.
first inflation + inflation caused by wages = final inflation
final inflation (x) a certain constant = inflation caused by wages
Then you can use some linear algebra and substitution
The phenomena of what is going on is also similar to the infinite sum theorem, where wage increases keep leading to price increases, which keep leading to more wage increases, but incrementally less and less, until they establish themselves moving towards some final stable point.
Let's say that for every $2 in wage increases it leads to $1 in price increases.
If you start inflation off at 4%, then the additional inflation caused by wage increases would also be 4%, leading to a final 8% total inflation rate with an 8% increase in wages.
(1/2 + 1/4 + 1/8 + 1/16 etc) times the original 4% will be the additional increase