Ratchet effect
The ratchet effect , even ratchet effect ( English ratchet , ratchet , locking grid ) is a term used in macroeconomic theory and refers to changes in the ratio of nominal wages to prices ( real wages ) in the Keynesian version of Total models for open and closed economy .
The Keynesian model Total but strictly seen a total model, even if it deals with aggregate sizes because the price level is not flexible there. However, the following statements should apply to a flexible price model .
If one assumes a price level-income diagram in order to plot the aggregated goods supply and goods demand functions , the Keynesian variant of the goods supply function is characterized by a "kink" which is located exactly where the equilibrium price level prevails, i.e. where full employment is by definition prevails on the labor market and the maximum equilibrium income is realized, in contrast to the neoclassical goods supply function, which is price inelastic.
Requirements on the labor market
The macroeconomic supply of goods is realized by inserting the equilibrium amount of employment that was determined on the labor market (and does not automatically mean full employment, but merely an intersection of the labor supply and labor demand curve) in the production function. For example, one can assume a Cobb-Douglas production function here . The demand for labor (companies) base their demand on the real wage rate, as do the labor providers (employees). The real wage is composed of the nominal wage W and the price level P (W / P). Both understandably have different preferences . Employees are assumed to be willing to offer more working time with higher real wages (the increase in money is assumed to be more attractive to them than the increase in free time that they could achieve if they offer less working time at a higher wage), while the demand for labor in companies falls, the higher the wages they have to pay.
Effects of a price drop
The difference between the neoclassical and Keynesian views in this model is that the nominal wage rate in the underemployment situation is rigid, both upwards and downwards. In practice, this would mean that employees would oppose a reduction in nominal wages because this would reduce real wages following a disruption of the system, for example a price cut. A price decrease leads to an increase in real wages. The supply of labor has now increased, but the demand for labor has fallen. Involuntary unemployment arises from an excess supply on the labor market. This could be reduced by lowering the nominal wage. However, this is prevented by the labor providers.
Since a smaller amount of employment is now realized, there is also less production and thus the equilibrium income falls. We are below the "kink" in the price-elastic area on the Ys curve. Here the equilibrium income reacts to changes in the price level. With a price increase, the income can ultimately be increased again to Y0, since the surplus of supply on the labor market is reduced.
The pawl effect
Above the "kink", however, the neoclassical model should continue to apply, ie the nominal wage rate should be flexible upwards. Upwards, there is the classic dichotomy of the system, ie here the following applies: Changes in the price level result in changes in the nominal wage rate of the same size, so that the real wage rate remains unchanged at the full employment level. Changes in the nominal sizes therefore have no influence on the real sizes. On the downside, however, the nominal wage remains rigid. If, based on the full employment level, there is now a price increase, the nominal wage will rise with it. But if prices now fall, W is immediately rigid, i.e. H. with every price decrease, income goes down immediately. However, this means that the price-elastic area must have shifted upwards with it. In the picture, the new price-elastic area is the upper diagonal. The lower diagonal is therefore meaningless, since it is assumed that a nominal wage level that has been reached is no longer exceeded. The price-elastic area thus acts like a pawl.
Recommended reading
- H.-W. Wohltmann "Fundamentals of the macroeconomic theory", 4th edition. Oldenbourg Verlag 2005