However, as the midterm break is coming soon I may have much more times for the update and I have got a quite interesting topic to write about! The topic is gonna be an "Economic Theory". I will introduce an economic policy of Hayato Ikeda the former prime minister with refering to Kenynesian economic growth theory.
* In addition: I attach a copy of one of my uni course works which is one of the most interesting one.
In terms of Keynesian Theory of “sticky wage”, the wage is counter-cyclical by means of the business cycle. Keynesian theory adjusts wage is fixed because wage is determined by a contract for a certain period so it hardly changes. Unlike the classical theory which denotes the “neutrality of money”, Keynesian theory indicates money supply influences an economic growth and the value of wage comparing to a current inflation rate. This theory clarifies that change in the price level influences how nominal wage, which is the actual wage individuals are paid, is worth, and then refers to “real wage” which is denoted as nominal wage divided by price inflation.
Focusing on the graph above, as an economic growth, implies aggregate demand rises from AD0 to AD1, occurs price rises from P0 to P1. Simultaneously, labour supply curve goes rightward alongside labour demand because more individuals are now willing to participate in an economic activity. All in all, price rise lowers real wage (W/P), which implies nominal wage is less worth than the current price level. On the other hand, economic recession causes price goes down which create aggregate demand goes down. This shifts labour supply to the leftward alongside labour demand because individuals are more likely to be expelled from labour market because of job loss and rise in real wage. J M Keynes put emphasis on the impact of real wage during the recession. He inferred as price level goes down revenues of sales goes down and the value of nominal wage which is fixed by contracts is higher comparing to the current price level. Therefore, employers are willing to cut down numbers of employees due to the rise in their cost coverage.
Real wage is the measure how nominal wage is worth comparing to the current price level. The reason why government policy makers care about the real wage level is it causes a fluctuation in employment rate. The rising real wage during a particular recession period causes rise in unemployment. Unemployment is quite lagging so then affects to remains an unemployment rate higher than expected in later periods. People might be used to being unemployed and structural unemployment is concerned after some individuals are unemployed for a relatively longer period.
≫ Keynesian theory highly put emphasis on wage counter-cyclicality along the business cycle
- It does not account either change in labourers demanded or wage pro-cyclicality
- Wage is fixed by contract
- During the recession price keeps going down due to the pessimism about future
- “Exogenous fall in investment” causes economic growth more stagnated i.e.
- Lowering interest-rate is less effective because of the pessimism
- Fiscal policy, creating public sector jobs and taxation policy, is more affective
≫ Friedmanite theory assumes wage is more likely counter-cyclical
- During the growth, technological advance may causes wage pro-cyclicality due to a rise in demand of labourers
- Although wage is reasonably flexible but there is a gap between the price inflation rate and the wage inflation late e.g. Price (5%); Nominal-Wage (2%)
- Lack of Rationale: During the recession, the real price fall can be lower than expected
- Monetary policy is affective in the short-run
- Information should promote the rational expectation.
