Wednesday, June 24, 2015

The Wages-Fund Doctrine for Dummies

 Wages-fund doctrine simplified:
1. Wages increase when the wages-fund increases. 
2. The wages-fund increases when profits increase. 
3. Profits increase when wages are kept low.
Thus the way to increase wages is to lower them.
Wages-fund doctrine updated:
1. Full employment requires economic growth. 
2. Sustained economic growth requires low inflation. 
3. Controlling inflation requires limiting wage demands. 
4. Limiting wage demands requires a non-accelerating inflation rate of unemployment (NAIRU).
Thus the way to achieve full employment is to circumvent it.

1 comment:

Denis Drew said...

If a retailer lives on 5% profit and raises prices 5% which in turn loses 5% of sales then the retailer ends up back in pretty much the same place -- because the retailer is working from profit on gross income (100%).

If a labor union forces the retailer to raise prices 5% which in turn loses 5% of sales then the labor union is way ahead -- because labor (in this example) represents only 10% of retailer costs. Total sales drop 5% but labor's price is up 50%.

OTH, if the retailer can squeeze (unorganized) labor back to 5% of costs while maintaining the same price level then the retailer will double his (formerly 5%) profit.