Category Archives: Wage-Price Spiral

The Silly Side of Minimum Wages

The front page of the US print edition of the Wall Street Journal sports an article that expresses in simple language the fiasco thatcomes from a policy seeking to reduce inequality. The article, New Wage Law Raises Pay- And Tensions – explains what is happening in areas where organizations are adopting the socialist policy of raising minimum wages independent of productivity improvement.

Some of the tensions come about as those on the middle rung of wages, who have earned increases over time due to hard work and tenure, now see their rewards watered down. It seems unfair to them. Yet those same firms hearing of these complaints have little or no ability, or desire, to raise wages for all. And why should they, that would obfuscate the point of raising the minimum wage. Some people have left jobs due to their unhappiness at the so called, ‘wage compression’.  

The whole debate about minimum wage and its increase are all wrong. There is research that suggests that increasing such wages increase unemployment. There is research that suggests that some situations have successfully supported raising minimum wages without increased unemployment. Can we just call a pig a pig?

It does not take a PhD to realize that if you arbitrarily increase the pocket money for one child, there is less to go around for the others. It is as simple as that. Raising minimum wages is a socialist policy designed not to help the lowest workers in the rung but an attempt at redistributing wealth. At the same time it is argued that doing so puts needed spending power in the pockets of those that need it most – without any increase in productivity.  What rubbish.  The money has to come from somewhere.  As it stands such actions will effectively lower that most important key to growth, productivity. So the policy will actually misfire.  

We do need a minimum wage to help prevent abuse and a basic ‘living wage’. It does not need to be index linked (else it creates self-fulfilling inflation) and it does not need to be raised at a time when growth is anemic. We should instead focus on policies to drive growth that will spin-off surplus wealth to fund such wage growth- not the other way around.  

Now we are headed in the wrong direction and the very policy designed to help the less well off working man and woman will actually hurt then. No PhD required- just try running your household the same was as these ‘politicians’.


Central Bank Experiment with Negative Interest Rates Not Working – Negative Wage-Price Spiral Forming

You have to realize that even though several central banks have taken their overnight or interbank rates negative (e.g. Japan, Euro-zone, others etc.) the actual interest rates to commercial and personal sectors remains positive or zero.  Real interest rates for you or I are not negative.  You then have to understand the point of negative interest rates is to help spur growth.  If it costs money to park excess funds with a bank, surely you would prefer to deploy the money and build something or invest in some initiative?  Wrong.  A report on the front page of the US print edition of the Financial Times (see Japan’s negative interest rates backfire amid Union climb down on pay claim) explains the perverse unintended consequences of negative rebates on wage demands. A union in Japan has just jettisoned its demands for a wage increase.  As such the very need for inflation is undermined and so deflation will again be the talk of the town.  We are seeing the formation of a negative wage-price spiral in that prices fall, and so wages fall, and so on.  Economists have been very much aware of the usual and positive wage-price spiral.  We are seeing the evil twin emerge before our very eyes.

And if that was not enough, other stories point to the fact that the market is expecting the ECB to further deepen their own negative interest rates.  Hang on folks, it’s gonna be a bumpy ride.