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Why Falling Inflation Is A False Pretext For Keeping Wages Low

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http://www.theguardian.com/business/economics-blog/2015/mar/29/why-falling-inflation-is-a-false-pretext-for-keeping-wages-low

Earlier this year Shinzo Abe, Japan’s prime minister, told his country’s business elite that he wanted them to take a brave decision. He wanted them to raise wages.

A month or so later David Cameron followed suit. Addressing the chambers of commerce, the prime minister said it was time for Britain to have a pay rise. Two prime ministers, same message, one subtle difference: in Japan there is evidence that executives took notice of what Abe said, while in the UK we are still waiting for the long-anticipated pick up in pay.

There are virtues to Japan’s corporatist model. When Abe spoke, it mattered. When Cameron spoke, it didn’t.

Let’s be clear. We are talking about different countries here. Britain ditched its corporatist model long ago and replaced it with a flexible labour market. What’s more, deflation has been a feature of the Japanese economy for the past quarter of a century; Britain has yet to experience a single month when annual inflation as measured by the consumer prices index has been falling.

Even so, Japan’s recent experience is relevant. It shows the dangers of allowing deflation to become embedded and that radical measures are eventually required to cure the problem. In the UK, it is assumed that the fall in inflation to zero is a temporary phenomenon. Almost all of the nine members of the Bank of England’s monetary policy committee think that the next move in interest rates will be up.

..

Of even more significance is what has been happening to wages. Here, the “deflation-is-not-a-threat” school argue that falling unemployment will translate into higher pay settlements. Confronted with official data that shows this is simply not happening, the response (as it has been for the past two years) is: give it time.

Andy Haldane, the Bank of England’s chief economist, noted in a recent speech that since 2011, unemployment had consistently undershot the Bank’s forecasts. Threadneedle Street has also got it spectacularly wrong with regard to wages. Given the shorter dole queues, the Bank expected wage settlements to become more generous. According to the Bank’s models, earnings should be rising by more than 4% a year by now. In reality, they are struggling to get above 2%. That is not simply because productivity is weak, although that is part of the story.

What I doubt is being factored in to this is people who aren't on the dole but on a zero hour contract, who may just earn enough not to claim the dole that week and people working part-time. You can have shorter dole queues and lower demand because people aren't earning enough to have disposable income.

Still I'm sure we can afford the deflationary blackhole.

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Strange for the guardian not to mention the fact that the UK has been flooded with immigrants willing to work for peanuts when Japan hasnt.

I would have thought 'free movement of labour' would fall under the remit of 'flexible labour market' afterall.

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Strange for the guardian not to mention the fact that the UK has been flooded with immigrants willing to work for peanuts when Japan hasnt.

I would have thought 'free movement of labour' would fall under the remit of 'flexible labour market' afterall.

The Guardianistas are uncritical Keynesians to a man, hence the nonsense about 'allowing deflation to become embedded'. It's all the govt's fault for not spending enough, you see. If only the austerity reins were relaxed sufficiently then world + dog could be put to work. Naturally, the Godzilla-sized counterexample of Japanese public debt, some 240% of GDP and climbing, is seldom entertained. In reality, many high paying bubble jobs in finance, insurance and construction have now gone forever, replaced by low paying govt make-work exercises and unemployment parking schemes.

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Surely flexible labour = wage suppression- I'm surprised that they are surprised- wasn't low wage growth the policy?

There seems to be a lot of competing memes about these days- we need wage hikes to combat deflation but we need wages to remain low in order to compete- so one group of morons seem to be following strategies that contradict those of another group of morons.

Or are they the same morons with an attention deficit problem?

Didn't Mark Carney recently 'warn' business that they should not use deflation as an excuse to suppress wages? Why would they need an excuse to pay the market rate?

Or is he under the illusion that wages are some kind of meritocratic arrangement where people are paid what they deserve?

Edited by wonderpup

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Don't worry Labour are coming along to magic up a high skill economy; living wage and candy for everyone.

Juxtaposed with the rinse-repeat free. coerced labour under the current regime. Heard a horror story about a young man, a large DIY store and threats of sanctions this week.

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The Guardianistas are uncritical Keynesians to a man, hence the nonsense about 'allowing deflation to become embedded'. It's all the govt's fault for not spending enough, you see. If only the austerity reins were relaxed sufficiently then world + dog could be put to work. Naturally, the Godzilla-sized counterexample of Japanese public debt, some 240% of GDP and climbing, is seldom entertained. In reality, many high paying bubble jobs in finance, insurance and construction have now gone forever, replaced by low paying govt make-work exercises and unemployment parking schemes.

At the ZLB.

Japan is Japan. Like Greece is Greece. Fallacy of comparison.

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