Purchasing power theory

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The purchasing power theory of wages is a demand-side economic theory . It says that in under-utilization of production factors of an economy by increasing wages at the level of productivity inflation free the purchasing power and thus the demand for consumer goods could be increased. Both directly and indirectly, new jobs would be created , as entrepreneurs see the increased consumption as a signal to invest more.

The purchasing power theory of wages is represented, among other things, by trade unions to justify wage increases ; the term came up in the 1920s primarily through Fritz Tarnow . As an example of the validity of the purchasing power theory, reference is often made to the Great Depression in the 1930s, when, according to the supporters of the purchasing power theory, wage cuts intensified the crisis. Economies of scale are expected to have a further positive effect on economic growth . Since unit costs fall as production rises, greater demand resulting from additional purchasing power leads to an increase in prosperity.

Theoretical justification

It is assumed from the theory of the circular economy that total demand in a simple economic model, without a state, in a closed economy, i.e. without foreign trade, is composed of consumption and investment .

If one assumes a post-Keynesian consumption function , according to which the consumption rate for wage earners is higher than for profit earners ( e.g. Nicholas Kaldor ), then wage increases lead to a higher wage share and thus to higher consumer demand. All other things being equal , overall demand would increase.

Assume that investment demand

  • is stable in the long term because it is determined by long-term expectations, or
  • itself is positively determined by changes in demand, i.e. increases with increasing total demand, or
  • by means of third variables, such as how the interest rate is determined, i.e. does not react negatively to rising wages

Under these assumptions, rising wages lead to higher aggregate demand, more production and more employment.

The cost effects of rising wages can also be mitigated if increasing economies of scale , i.e. higher capacity utilization, dampen or offset the rise in costs.

Graph of purchasing power theory and counter arguments

Graphic of the purchasing power theory and counterarguments

criticism

If unemployment is seen not as the result of insufficient demand but as the result of high wage costs, higher wages result in even higher unemployment.

If there are bottlenecks in the economy, higher wages cannot lead to more production and employment.

If one takes foreign trade into account and rising wages lead to rising unit labor costs , then this reduces international competitiveness - at a constant exchange rate - so that increasing consumer demand is offset by falling exports . When the exchange rate falls, imports become more expensive .

What speaks against a purchasing power- oriented wage policy is that there may be positive economies of scale that counteract the direct cost effects of rising wages. As a rule, therefore, overall higher unit costs and thus negative macroeconomic welfare effects are considered likely.

On the other hand, the argument is criticized that the purchasing power effect of wage increases is reduced because part of the additional income would be saved, another part would be used on demand for foreign goods ( imports ). From this point of view, savings are also seen as having an impact on demand, because they finance investment spending or export surpluses. Imports presuppose that trading partners exist on goods or foreign exchange markets who are interested in domestic currency, that is, who want to generate domestic demand.

The reaction to wage increases as a result of increased prices is called the "second round effect" if they result in new cost increases and, as a result, new price increases. The spiral effect of this effect contributes to the threat to monetary stability ( inflation ).

Heiner Flassbeck and Friederike Spieker consider "the purchasing power theory just as questionable as its opposite, the profit theory of wages" (see GIB formula ). The two scientists refer to the purchasing power theory, according to which real wages should rise more than productivity. The symmetry of economic logic, however, indicates that wage increases above productivity increase purchasing power as little in the long run as wage increases below productivity increase profits in the long term. The working group Economy of the DIW expressed a similar opinion in 1998. “Which result is realistic can only be decided empirically. At the theoretical level, the overall effect is indeterminate. "

literature

  • Michał Kalecki : Nominal and Real Wages. ( Place nominalne i realne. Instytut Gospodarstwa Spolecznego, Warszawa 1939). In: Ders .: Crisis and Prosperity in Capitalism. Selected essays 1933-1971. Metropolis Marburg 1987, ISBN 3-926570-01-6 . Pp. 71-91.

Web links

Individual evidence

  1. ↑ Reinhard Bispinck, Thorsten Schulten: The concept of the expansive wage policy - a critical appraisal from today's perspective. In: Reinhard Bispinck, Thorsten Schulten, Peeter Raane (eds.): Economic democracy and expansive wage policy. On the topicality of Viktor Agartz . VSA-Verlag Hamburg 2008.
  2. ↑ Ulrich van Suntum : Explain the world to me (64): Why are high wages bad? In: Frankfurter Allgemeine Sonntagszeitung . No. 35 , September 2, 2007, ISSN  0174-4909 , p. 56 ( faz.net ).
  3. ↑ a b Heiner Flassbeck, Friederike Spiecker: Wages for work . In: The daily newspaper . 2006, p. 11 ( taz.de ).
  4. ↑ Weber sees growing inflationary pressure ( memento of February 21, 2011 in the Internet Archive ), Financial Times Dtl., February 20, 2011.
  5. ↑ diw.de DIW -Berlin, Economic Working Group , Weekly Report 1–2, 1998.