Unemployment benefits and the deflationary trap
Krugman &co keep warning about the deflationary trap. Basically, the problem of having falling real wages and prices, which then tend to get baked into business and personal planning, creating a very hard circumstance to avoid. How can good unemployment help this? By making workers not mind as much going without jobs rather than staying, and making businesses less reluctant to do layoffs. Paradoxically, if businesses ask workers to stay on and accept pay cuts, this can feed into a deflationary spiral. The model is that since the cost of labor goes down, firms can cut the cost of their goods to capture the reduced consumption. Consumption is reduced because workers expect their wages to go down. Thus the deflationary trap. ¶ 10:36 PM
Friday, January 30, 2009
As we wrestle with what to do about the financial crisis, I find myself convinced that better/smarter unemployment benefits are a key part of it. There is plenty of talk about how people who are unemployed are good targets for stimulus because they'll spend, and about how they'll benefit from the jobs created by infrastructure development projects. Here's another angle.
Krugman &co keep warning about the deflationary trap. Basically, the problem of having falling real wages and prices, which then tend to get baked into business and personal planning, creating a very hard circumstance to avoid. How can good unemployment help this? By making workers not mind as much going without jobs rather than staying, and making businesses less reluctant to do layoffs. Paradoxically, if businesses ask workers to stay on and accept pay cuts, this can feed into a deflationary spiral. The model is that since the cost of labor goes down, firms can cut the cost of their goods to capture the reduced consumption. Consumption is reduced because workers expect their wages to go down. Thus the deflationary trap. ¶ 10:36 PM
