“Variations in unemployment rates can be explained by changes in the productivity-adjusted real wages received by labor. Other things equal, rises in productivity or prices tend to have the impact of lowering unemployment, as does falling money wages. This implies inflationary monetary policies will increase employment and lower unemployment—the Phillips Curve phenomenon. But consistent inflation changes expectations, and reduces the willingness of workers to supply their services at any given price, typically leading to increases in unemployment. Unemployment during the highly inflationary 1970s, for example, was higher on average than in the less inflationary 1950 and 1960s. Government attempts to manipulate wages and prices have employment effects. Wage enhancing policies like minimum wage laws or pro-union legislation typically raise unemployment rates, for example. Monetary policy that increases an expectation of price stability is usually associated with relatively robust employment conditions, as we observed in the 1920s, 1950s, most of the 1960s, and, to a somewhat lesser extent, in the period from about 1985 to 2000. Monetary and fiscal activities that promote productivity advances likewise increase employment opportunities and tend to reduce unemployment. Nearly every major spike in unemployment in the 20th century is associated with some government actions that led to temporary wage-price-productivity dis-coordination: the depression of 1920-22 was an outgrowth of explosive monetary expansion followed by deceleration and reversal of that growth in the World War I era. The 1929-41 Great Depression reflected a downturn prompted by a consumption bubble arising in large part from excessive monetary growth, and then various strategies designed to raise wages, ranging from moral suasion under President Hoover to laws such as the National Industrial Recovery Act and the Wagner Act under President Roosevelt. The downturns of the mid-1970s and 1981-82 are related first to the ineffectiveness of monetary and fiscal expansion in the midst of rising inflationary explanations, and then to the effects that the reversal of monetary expansion had temporarily on real wages and thus labor markets.” Read more.
Can Monetary Policy Really Create Jobs?
Richard K. Vedder
Testimony before the Committee on Financial Services, Subcommittee on Domestic Monetary Policy and Technology, February 9, 2011.
Via the Independent Institute.
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