Nominal contracts

from Wikipedia, the free encyclopedia

Nominal contracts are an approach taken from economics . This developed the previously known macroeconomic models such as Okun's law , the extended Phillips curve and the aggregated demand relationship considerably. The approach of nominal contracts examines what influence the setting of wages (e.g. through collective agreements) and prices have on a disinflationary policy . Disinflation is the process in which the inflation rate is lowered.

Causes of the wage scale

The wage scale gives an economy the opportunity to adapt to industry-specific shocks and to adapt to them. These shocks are caused by changes in demand or supply that cannot be influenced. Graduating wages allows companies to collect information about other markets, monitor price developments in those markets and filter out information about monetary policy shocks. Industrial companies in particular benefit from the pay scale due to their strategic orientation.

Fischer's approach

Stanley Fischer developed an approach that takes into account the fact that nominal contracts in the form of wage agreements are periodically renegotiated and fixed. This is especially the case in economies with low inflation rates. The previous inflation rate is taken into account in the wage negotiations . The frequency of these wage negotiations depends on the stability of the output level, i.e. how far the total production increases in a period. It also depends on the price development of an economy. In extreme conditions such as hyperflation, wages can even be changed daily or weekly.

With a full policy of disinflation , the European Central Bank is withdrawing money from the market. Because of this, the real money supply in an economy decreases. As a result, interest rates rise and, as a result, consumers demand fewer goods (especially capital goods such as real estate). This leads to a decline in output growth and thus an increase in unemployment.

One problem that arises here due to the wage tiering is that once they have concluded their wage contracts, companies are no longer able to adjust their inflation expectations to the target announced by the central bank . This means that the companies would assume a much higher inflation rate than the politically planned inflation rate in their wage negotiations and contracts. In order to be able to take into account the possible lowering of the inflation rate in the upcoming wage setting negotiations, political measures of the disinflation should be announced in good time.

Taylor's approach

John B. Taylor developed Fischer's approach further. Taylor takes into account that wage contracts are not concluded at the same time, but rather staggered by the various companies. The problem here is that the individual companies also take into account the wage decisions of related or market-leading companies when concluding their wage contracts. The newly concluded wage contracts are thus the same. As a result, not only inflation expectations from the future, but also inflation expectations from the past are included in current wage negotiations. That means that here too, not a lower but a higher inflation rate is taken into account. Because of this, a decrease in money supply growth would not lead to a decrease in the inflation rate, but a decrease in the real money supply. This would lead to a recession and, as a result, an increase in unemployment . Among other things, the risk of unemployment arises specifically for employees whose wages have already been set new and higher, since as wages rise, employers prefer to employ employees whose wages have not yet increased (e.g. members of other trade unions or low-paid workers).

Disinflation without unemployment in the Taylor model

Fig. 1: Disinflation without unemployment in the Taylor model

Figure 1 shows the course of the inflation rate taking into account the time staggering of wage contracts and thus without an increase in unemployment in the United States of America. It is taken into account here that at the time the political measure is announced, only wage contracts with high inflation expectations are in force . Because of this, it is necessary for the central bank to slowly lower the inflation rate first. By announcing the gradual reduction of the inflation rate by the central bank and implementing it accordingly, the contract partners have the opportunity to take the falling inflation rate into account in their future wage negotiations. Only in the further course of the year may the lower rate show a greater value, since only then has the majority of the wage contract parties considered the lower inflation rate in their contracts.

criticism

Even with a gradual decrease in the inflation rate, there is a risk, especially for reasons of credibility, that unemployment will rise. In this case, the wage contracting parties would ask themselves, for example, why the central bank waits 2 years to reduce the money supply when the political decision to carry out disinflation has already been made. Because of this, the parties' inflation expectations would not change. Furthermore, fears could arise that if the economic situation changes, the central bank will not stick to its plans.

Other possible solutions

Increase in the frequency of wage adjustments

Another way to counteract the rise in unemployment is to adjust wages more frequently to match the inflation rate. This could potentially guarantee full employment to the economies. However, more frequent adjustments in wages can hinder the wage and price adjustment process. Furthermore, the high costs of wage negotiations (which arise, for example, from strikes) as well as the asymmetrical supply of information about the actual level of the inflation rate and measurement problems when determining those speak against frequent wage adjustments. Ultimately, this is a complex model that depends not only on one, but on several variables that also have to be adjusted.

Indexing of wage contracts

When wages are indexed, wages are adjusted if they exceed a contractually agreed index (e.g. an official cost of living index). However, this wage indexation poses a problem especially for companies whose economic situation has deteriorated. They would no longer be able to keep their wage adjustments below the inflation rate. Furthermore, the high price for the labor factor would result in a supply shock, since many previously inactive workers would be willing to offer their work because of the higher wages. This would provide the basis for a wage-price spiral , as the higher wages that companies pay would have to be compensated for by the prices for the goods offered by the companies. This would permanently increase inflation.

Wage cuts

A cut in wages could create additional employment. The problem arises here that job satisfaction and motivation would decrease, which would lead to a reduction in productivity and fluctuation. This would result in increased costs for the search and training of new or additional workers.

Individual evidence

  1. ↑ a b c Blanchard, Olivier; Illing, Gerhard (2006), Macroeconomics , 4th edition, Munich: Pearson Studium, p. 280
  2. ↑ Taylor, John B .; Woodford, Michael (2003), Handbook of Macroeconomics , Vol. 1B, 2nd impr., Amsterdam: Elsevier, p. 1037
  3. ↑ Dornbusch, Rüdiger; Fischer, Stanley; Startz, Richard (2003), Makroökonomik , 8th edition, Munich: R. Oldenbourg Verlag, p. 151
  4. ↑ a b Dornbusch, Rüdiger; Fischer, Stanley; Startz, Richard (2003), Makroökonomik , 8th edition, Munich: R. Oldenbourg Verlag, p. 152
  5. ↑ Taylor, John B .; Woodford, Michael (2003), Handbook of Macroeconomics , Vol. 1B, 2nd impr., Amsterdam: Elsevier, p. 1027
  6. ↑ a b Blanchard, Olivier; Illing, Gerhard (2006), Macroeconomics , 4th edition, Munich: Pearson Studium, p. 281
  7. ↑ a b Dornbusch, Rüdiger; Fischer, Stanley; Startz, Richard (2003), Makroökonomik , 8th edition, Munich: R. Oldenbourg Verlag, p. 153
  8. ↑ Taylor, John B .; Woodford, Michael (2003), Handbook of Macroeconomics , Vol. 1B, 2nd impr., Amsterdam: Elsevier, p. 1038
  9. ↑ http://www.economics.phil.uni-erlangen.de/lehre/lehrverbindungen/vwl/ss2007/makroIII/kapitel07.pdf  ( page no longer available , search in web archives )  Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. , Retrieved April 21, 2008@1@ 2Template: Toter Link / www.economics.phil.uni-erlangen.de  

literature

  • Blanchard, O .; Illing, G .: Macroeconomics , 4th edition, Pearson Studium, Munich, 2006, p. 280ff. ISBN 3-8273-7209-7
  • R. Dornbusch; S. Fischer; R. Startz: Makroökonomik , 8th edition, Munich 2003, p. 151 ff. ISBN 3-486-25713-7
  • JB Taylor; M. Woodford: Handbook of Macroeconomics, Vol. 1B; 2. impr., Elsevier, Amsterdam 2003, pp. 1027 ff. ISBN 0-444-50157-6