Mechanism of Deflation spiral and critic of Japanese policies --- Sequel

Speaking of the motivation of labour correlated to the wage level, this has been explained by the school of marginal theory referring to the graph below:



The propensity to allocate time to labouring can depend on the wage incentive. During the wage level is lower, the correlation of labouring time and wage is highly positive, which implies people tend to work harder as wage goes up. Also, most of people appreciate that if individuals earn extraordinary high wage the correlation of labouring time and wage can be negative as these individuals hold enough cash already to sustain their minimum standard of living by working little. But this situation is not the situation of majority of individuals so this essay ignores this part, then it focuses more on the lower wage earners and individuals those earn about between the slightly lower and moderately higher than average. The efficient wage level is where labourers are encouraged to allocate time to work at the efficient level whenever the wage level is, which implies the wage elasticity of supply is perfectly inelastic. At this level, the unemployment rate reaches to the natural rate which denotes the level of economic activity is moderate and stable. However it is quite difficult to detect the stationary point between the positive correlating point and the perfect inelastic point, where is supposed to be a most suitable point to settle the minimum-wage level. Furthermore, if economists overestimate this point, it harms the supply-side, which is the side employs labourers from the labour market, and encourages employers to hire less labourers therefore conversely increases the unemployment rate. Thus, this situation is more likely to concern an expected simultaneous rise in economic growth and wage inflation. The economic growth which does not stimulate rise in the wage level in the lower than average occurs in current Japanese economy. As it explained in the prequel the deflation spiral instigates the situation unamendable to decrease the involuntary unemployment rate and the long term cause to induce the recession again.

In order to eliminate the situation Japanese economy has been in, both the change in labour laws and the encouraged price inflation are recommendable. During the operation of Zero-Interest-rate policy some economists suggested to operate the fiscal intervention into the private market in order to stimulate both the efficient economic growth, this connotation implies the situation in which the economic growth benefits social stability and environmental protection, and reduce the unemployment. In the situation where economic growth occurs but the price inflation is stagnated, the amendment of labour law can be the priority over the fiscal intervention. In order to distort the deflation spiral concerning to the lowering unemployment, the rise in minimum wage at the moderate level is insisted and the reinforcement of employment contracts to promote flexibility for labourers to secure appropriate labouring time and proper wage paid or alter a job is inevitably required. By means of the fiscal policy, the government could have increased the public sector jobs which can employ potential labourers who were reluctant to be employed by the private sector due to the current situation or invested into the private sector industries which encourages positive externalities like investing for venture businesses to encourage the market competition, improving and advancing the education level, reducing pollution level, increasing sufficiency rate of agricultural products, etc. Also an increase in public sector jobs may stimulate the rise in demand of labourers in labour market, which keeps the wage level up and then prevents the deflation spiral more likely.

By contrast, although this essay puts emphasis on the fiscal intervention into market in order to rise the demand of labourers and then accelerate the price inflation level it also warns the “excess” fiscal intervention. For example, Japanese Communist Party claims, aiming to increase public service, and introduction of universal coverage of the health service and a free education system, to inevitably increase the tax revenue. This top up of tax revenue takes the stagnation of the GDP growth for granted with intend to focus on the long run growth of both business and society. This is a typical Neo-Marxist of economic policy. We post modern Keynesians indeed contradict this opportunistic focus on the long run expectation of economic growth and the abandoned short run focus. The theory introduced in this essay affirms an importance of the budget balance of a proportion of GDP growth and the government expenditure. Although as same as Japanese Communist Party the theory of this statement regards high of the social stability, it strongly insists on both a non-volatile and upward economic growth and a deliberate fiscal intervention rather than a volatile economic growth.



Focusing on the graph above,