It’s government that gums up markets

According to Keynes, sticky prices in markets lead to a phenomenon whereby we can get disequilibrium in the labour market unless the government intervenes to prevent deflation. As ever, all the evidence seems to point in the direction of stickiness being imposed by government. Government then looks for some work for itself, deciding to intervene to overcome the problems it has itself created.

In a situation of deflation and when labour markets are slack, we need nominal wages to fall. That they do not do so more rapidly in the private sector is, in part, due to certain aspects of labour market regulation that prevent employers changing wages easily. However, that is not the main problem. In the private sector, employers can overcome such obstacles put in their way by government one way or another. And the residual stickiness that results is nothing compared with the problems created by government in respect of its own dealings. Consider the following:

1. Public sector wages are rising rapidly whilst private sector wages are stagnant or falling.

2. Amazingly, the government intends to increase pensions by 2.5% – a real terms increase of over 4.2% (when the economy has shrunk by 4%).

3. The minimum wage has gone up this month from £5.73 to £5.80 per hour (for workers aged over 21).

4. Social security benefits are underpinned in nominal terms so, given that the price level has fallen, social security benefits will go up in real terms by about 1.7% – again at a time when the economy is shrinking.

What causes nominal stickiness – markets or governments?

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.