2 ms·
In theory, that would work and solve the problem. In practice, downward nominal wage rigidity is a thing. http://mainlymacro.blogspot.co.uk/2013/10/nominal-wa
by the_why_of_y 12y ago
In theory, that would work and solve the problem. In practice, downward nominal wage rigidity is a thing.
http://mainlymacro.blogspot.co.uk/2013/10/nominal-wage-rigidity-in-macro-example.html http://mainlymacro.blogspot.co.uk/2013/10/nominal-wage-rigid...
(note especially the ludicrous 27% "natural rate" of unemployment for Spain predicted by standard economic models cited there)
Ordinarily the problem would be solved by de-valuing the currency against the more competitive economies' currencies, but with the Euro that's not possible.
So the best way in practice would be for the more competitive economies to incur some inflation, say 5%, for several of years so that the less competitive ones can stay at <1% and restore competitiveness that way.
Unfortunately this is politically impossible in the Euro zone today, hence we have 25% unemployment in southern countries.
- bsaul 12y agoi just realized another big difference between the traditional devaluation/inflation solution and the wage reduction : In the first case, savings and capital in general are affected as well, whereas in the second only workers are. So i guess wage reduction would restore competitivity but would also increase the inequality in the country dramaticaly (unless you dramaticaly increase the taxes on higher revenues and on savings as well). Another thing is that if a country changes its currency to be able to devaluate, you can be pretty sure that all the savings will immediately leave the country's bank and convert to stronger currencies. I guess every solution is a bad one.