The following points highlight the eight reasons for the advancement of flexible wage policy vis-à-vis flexible money policy. Some of the reasons are: 1. Double Dragon MEC 2. Slow and Wasteful Process 3. Leads to Price Instability 4. Discriminatory against Wage Groups 5. Increases the Burden of Debt and Others.
Reason for Advancement # 1. Double Dragon MEC:
If lowering of the rate of interest has to be brought about by a falling wage level, there would be, for reasons already enumerated, double drag on the MEC and a double reason for putting off investment and thus this will be postponing recovery.
Reason for Advancement # 2. Slow and Wasteful Process:
Again, except in a socialist community where wage policy is settled by law, there is no uniform means of effecting wage reductions for every class of labour.
This would be achieved by a slow and wasteful process affecting the weakest group; whereas, the quantity of money is within the power of most governments by open market and other similar operations.
Reason for Advancement # 3. Leads to Price Instability:
ADVERTISEMENTS:
The chief demerit of flexible wage policy in a free society like ours is that it will create such great instability of prices as to make business calculations impossible. A free enterprise economic system based on price mechanism requires for its proper functioning a reasonable stable value of monetary unit.
Reason for Advancement # 4. Discriminatory against Wage Groups:
According to Keynes with regard to the remuneration of the most of the groups in society, which are fixed in terms of money and comparatively somewhat inflexible, “it can only be an unjust person who would prefer a flexible wage policy, unless he can point to advantages from the former not obtainable from the latter.”
Reason for Advancement # 5. Increases the Burden of Debt:
Moreover, the lower price level incident to a fall in money wages increases the real burden of both private and public debt. If public debt happens to be heavy, this becomes a major objection to any deflationary policy like wage and price reductions. Thus, according to Keynes “having regard to excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former.”
Reason for Advancement # 6. Deflationary Income Redistribution:
A general money wage cut policy is not favoured on the ground that it leads to more unequal distribution of real income between the wage earning classes and non-wage earning classes (rentiers, etc.) as the latter would gain a clear advantage at the expense of the working class; the rich would continue to get fixed income from bonds and other forms of contractual securities while the income of the working class will decline as a result of wage cuts.
Reason for Advancement # 7. Politically Explosive:
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A general wage cut policy is denounced on social, political and economic grounds, inasmuch as it leads to great discontentment, opposition by workers and trade unions. Economically, it does not have any favourable effects on the constituents of effective demand. It is immoral and anti-social.
Reason for Advancement # 8. Worsening of the Terms of Trade:
In case of open economic system, reduction in money wages, though it may improve the “balance of trade”, is likely to worsen the “terms of trade” leading to a reduction in real income. The above-given analysis of wage-cuts and employment has given much more weighty arguments against wage reductions as a policy for promoting full employment.
The whole controversy has now foiled down to the relative weightage to be given to Keynes Effect and Pigou Effect.