According to Keynes, sticky prices in markets lead to a phenomenon whereby we can get disequilibrium in the labour market unless the government intervenes to prevent deflation. As ever, all the evidence seems to point in the direction of stickiness being imposed by government. Government then looks for some work for itself, deciding to intervene to overcome the problems it has itself created.
In a situation of deflation and when labour markets are slack, we need nominal wages to fall. That they do not do so more rapidly in the private sector is, in part, due to certain aspects of labour market regulation that prevent employers changing wages easily. However, that is not the main problem. In the private sector, employers can overcome such obstacles put in their way by government one way or another. And the residual stickiness that results is nothing compared with the problems created by government in respect of its own dealings. Consider the following:
1. Public sector wages are rising rapidly whilst private sector wages are stagnant or falling.
2. Amazingly, the government intends to increase pensions by 2.5% – a real terms increase of over 4.2% (when the economy has shrunk by 4%).
3. The minimum wage has gone up this month from £5.73 to £5.80 per hour (for workers aged over 21).
4. Social security benefits are underpinned in nominal terms so, given that the price level has fallen, social security benefits will go up in real terms by about 1.7% – again at a time when the economy is shrinking.
What causes nominal stickiness – markets or governments?