Can someone explain Krugman's argument that "thereâs no adverse effect at all of the wage increase on output"? http://www.princeton.edu/~pkrugman/nominal_wage.pdf Krugman says that: "Now suppose that the evil New Deal pushes up nominal wages. This shifts the AS curve up, which leads to a higher price level and lower output:" I do not understand why we cannot also have a shfit in AD curve at the same time. AD curve depends on consumer expenditures and if wages increase then the AD will also increase. Thus, even if the AD curve is vertical, the wage increase results in higher output and there is basically no need for an argument. Am I missing something? P.S. I am an enginner but I took several Econ courses.
might want to look into codewords and keywords that politicians use for inflation. But this is fun to play with - the interactive graph at the bottom. http://www.whitenova.com/thinkEconomics/simul.html
I am not an Economist, so Mr. Krugmans' remarks may be zooming over my head, but ..... I would wager that a smarter person than me could argue that his Y= F(N) is an erroneous assumption. Output as a function of employment seems to have some holes in the logic, if he is using this formula dogmatically. The greatest error, in my unlearned opinion, is the disregard for the historical baseline just prior to the manipulated increase of AS ( as manipulated by Krugmans' New Deal part Dos).... In other words, say on 5 Dec 2008 the minimum wage law was $6.75 per hour, and by governmental decree, on 8 December 2008 the minimum wage law was increased to $ 13.50 per hour. Without a corresponding increase in productivity or innovation, the baseline remains the same as on 5 December, however, the staple products , food, fuel, etc., would see a higher shift in end user pricing, while those employed at the discretionary product level, where the minimum wage workers are clustered, would suffer due to decreased demand.
I think you and Krugman are saying the same thing. He is saying that when there is a liquidity trap, as there was in the 30s and now, then the AD curve no longer slopes down, but could take the form of a vertical line, whereby demand doesn't decrease in the classical manner.
That's not so clear -- many discretionary products are imported, and therefore the minimum wage increase would not apply to the producer's cost to make those goods. Since the domestic wage earners would have more income, the demand for discretionary products would increase. Given the excess capacity in China right now increased demand would probably not be accompanied by an increase in prices. There would, however, be decreased demand for domestically produced goods and services that are low-end labor intensive, such as food service.