Inflation, Labor Market Theories, and Economic Policies
Interpretation of Inflation
Demand Approaches
There is an excess of demand over supply.
Classical Explanation (Bodin and Hume): According to them, prices rise because there was plenty of money.
Quantity Theory of Money (Fischer): M x V = P x T. Increased M leads to increased P.
Keynesian Explanation: Based on the behavior of aggregate demand, facing the potential of aggregate supply, or what is the same, the “productive capacity”. If aggregate demand is greater than aggregate supply, prices will increase.
Monetarist Explanation: Inflation is at all times a monetary phenomenon. By increasing the amount of money, prices will increase.
Supply Approaches
Focus on Cost Inflation: Inflation occurs because the factors of production raise their prices, so that the final price will increase.
Mark-Up Approach: Based on cost inflation, but considers that prices are fixed as a constant margin of production costs.
Focus on Core Inflation
Treats inflation as a global phenomenon, not just money or sticking to supply and demand.
Latin American Structuralist Explanation: Conceives of explanation as a global imbalance of the economy, dividing the productive forces. This is a political and social problem. It occurs when there are problems in the industry, no market outside the regressive tax system.
Sectoral Understanding: Inflation differences between sectors occur as prices rise.
Parable of Phelps Islands: The economy consists of many islands, and each has different wages, prices, and jobs.
Scandinavian Explanation: Related to foreign trade. Differentiates between countries with developed international trade, where prices are set from an international prism, and a second group of countries with closed economies, where prices are set under the domestic economy. Inflation will be noticeably higher in this second group of countries.
Policies to Combat Inflation
Demand Policies
All policies of demand will be designed primarily to shift the demand curve to the left to have a claim on us lower price levels. For this, we refer to two actions:
Monetary Policy: Attempt to stop the money that exists in the economy by issuing public debt (decreasing M). It could also increase the interest rate because it will hold back investment and thus higher prices.
Fiscal Policy: Two options: reduce public spending, which would cool the economy, reducing consumption, or raise taxes, thus there will be less income to spend.
Supply Policies
All supply policies are going to pretend to increase the supply, shifting the supply curve to the right.
Incomes Policy: Handle wages so that there is no price increase.
Sectoral Policies: In those sectors in which prices rise above the average, measures may be taken to ameliorate prices.
Foreign Trade Policy: Export and import products to stabilize prices.
Theoretical Models of the Labor Market
Keynesian School of Thought: Involuntary unemployment (insufficient effective demand). Unemployment in the economy will be considered at all times unintentional, and will be more pronounced in times of crisis or recession. They believe that unemployment will be a consequence of inefficient effective demand.
Classical School of Thought: Starts from the neoclassical paradigm: Sufficiency of the market to move the economy. Supply and demand are sufficient to run the economy. The labor market is identified with a larger market in the economy and, therefore, the forces of supply and demand balance will be responsible for the labor market. The salary will be the adjustment mechanism in the labor market. This wage is distorted when different institutions appear, causing unemployment.
- Distortions in the Wage:
- Efficiency Wages: Companies, in many cases, depart from what would be the equilibrium wage because they are willing to pay their workers higher wages to encourage them, to avoid going to other companies. This generates employment distortions.
- Theory of Outsiders-Insiders: In every company, there is a group of workers who have high bargaining power to set their salaries (Insiders), while another group of workers (Outsiders) see their salaries come from the company tax. These wage differences occur in situations of complete disequilibrium and unemployment.
- Institutionalist Theory: Wage-setting institutions generate distortions in the labor market (Author: Piore). The main distortions are generated by the unions because unions and employers will have different objectives.
- Theory of Domestic Markets of the Company: Companies will have to face two different market types: the foreign labor market (hiring employees) and the company’s domestic market.
- Theory of Duality in the Labor Market: There are two segments in the labor market: the primary labor market, consisting of good jobs, and the secondary labor market, consisting of bad jobs.
Employment Policy Measures
First Criterion
Policies that Affect Market Regulation: Operations that condition the entry and exit of the labor market, regulation on working time, and regulation of the process of wage determination.
Labor Market Policies:
- Passive: Early retirement, unemployment benefits for the unemployed. A set of measures that seek to ensure purchasing power to special groups within the labor market.
- Active: A set of measures that aim to promote employability and therefore eliminate imbalances in the labor market. Training, retraining, and job mobility. Measures for the creation of new jobs. Measures for specific groups. Coalition measures.
Second Criterion
Decreased Supply: Increased school age, decrease of the pensionable age, provision of paid maternity leave.
Distribution of Work: Decreased workday, decreased moonlighting, decreased overtime, encourage part-time employment.
On the Connection Between Supply and Demand for Labor: Creation and improving the operation of public agencies in unemployment and allowing private agencies. Local Politics and Employment: Can be a good choice to end labor market imbalances since knowledge is broader at the local level. Promote recruitment and apprenticeship training.
Economic Growth
Growth is the path of macroeconomic variables such as GDP, net national product, etc.
Neoclassical: Y = AK(L, K)
Endogenous Growth:
- Technological change is the engine of economic growth.
- Externalities: the stock of human capital is a source of progress.
- Education is important to the economic policy of governments to influence growth through investment in infrastructure.
- Y = F(K, L, H) where K = capital, L = unskilled labor, H = additional human capital and technology.
- All that is not consumed is saved. Countries with significant differences in savings and investment have differences in growth.
- Improved quantity and quality of human capital and production factors.
Income Distribution
Income distribution has a strong ethical component. Interesting from the standpoint of poverty. We must differentiate between categorical equity and vertical equity.
Categorical Equity: Individuals are entitled to consume certain goods in specified minimum amounts. It focuses on low-income groups. Trying to ensure minimum standards of goods for disadvantaged population groups and to avoid situations of extreme poverty.
Vertical Equity: Reduced global inequality among all groups of personal income distribution. Arriving at absolute equality in terms of income distribution.
Determinants of Staff: Inheritance, factor accumulation.
Measurement of Income Distribution
Tax Policy: Indirect taxes on luxury goods. Imposition according to income and earning capacity.
Expenditure Policy: Ensuring access to certain core resources to generate income, after leading the population to generate income (education, vocational training, university).
Quality of Life
Quality of life is the improved quality of life of people in qualitative terms. There are important aspects:
Quality of Goods and Services: Product labeling, expiry date, traceability.
Education: A process that brings happiness (Aristotle).
Health: Lifespan, quality of life, infant mortality.
Quality of Work Life: Time of arrival and departure to work, minimum wage established, availability of sick leave, time for culture, leisure.
Physical Environment: Air, water, wildlife.
Tools to Improve Quality of Life:
- Policy constraints and incentives (penalties).
- Direct political control (meat with points).
- Provision of public services (parks).
Politics of punishment (tax), politics of incentive grants.