As unemployment in Australia looks ominously set to soar the mindless are at it again endorsing preservation of real wages in the face of the most serious threat to employment Australia has faced since the Whitlam and Keating years. The reason they claim – keeping wages high will stimulate aggregate demand and the role of wages as a cost of production is exaggerated. It is also, they claim, socially just. Employers can deal with reduced demand for their output by means other than shedding labour – for example by investing in skills. Of course if this argument is valid then why not increase wages when the demand for labour falls – this will really get unemployment increasing at a time of falling Labor demand! Indeed that is the ‘strategy’ (to stretch a term) of the ACTU that I have recently discussed.
Of course, the reason this is so daft is that firms employ workers in terms of the value of their additional contribution to output the workers generate so that when this value falls employment will fall. The extra demand from higher incomes will only reflect extra spending from the diminished pool of those who hang onto jobs. Not from that pathetic lot forced to join the dole queues whose diminished incomes are paid for by transfers from those lucky enough to retain their jobs.
The notion that keeping wages high is 'socially just' is economic illiteracy. It is behind the nonsensical notion that whatever happens the real wage should only ever remain fixed or increase. A social wage can be sometimes preserved by means of government transfers but, in market economies - all economies other than North Korea and Cuba - privately paid wage signals determine employment decisions. The notion that wages themselves should reflect what dreaming lefties believe are appropriate living standards essentially denies the existence of labour markets.