Controlling Inflation Through Wage Freeze?

One popular suggestion regarding the battle against inflation is that we could stop all wage increases for businesses. But what if we did just that - would it work? Let's explore the implications of such a measure and why it might not be the panacea it seems.

Impact of Stopping Wage Increases

Suppliers would still raise their prices, and as a result, your wages would not go far enough. Over a decade, your standard of living would decline, and with consumers spending less, GDP would also decrease, leading to job losses. This scenario paints a not-so-rosy picture. Instead, addressing inflation involves reducing government intervention, such as refraining from stimulus spending.

Addressing Inflation through Nonlinear Income

Wages, being linear income, do not inherently cause inflation. In contrast, adverse inflation is often the result of incomes that increase faster than the target inflation rate. In other words, nonlinear income can exacerbate the issue. Therefore, a measure that ensures companies provide only linear income could effectively combat inflation.

Theoretically Possible, Practically Destructive

In theory, one could argue for freezing wages. However, in practice, the economic repercussions would be enormous. Such a step would lead to a quick economic downturn as spending would dry up. This outcome would be similar to the disastrous effects of price controls during the 1970s, which also triggered a recession.

Understanding Inflation and Its Causes

A wise man, a former professor, aptly compared blaming inflation on wage increases to attributing rain to wet pavement. While both are associated, the cause and effect have been reversed. Inflation is driven by excess money supply, whereas wage demands are a reaction to inflation, not its cause.

Wage Growth as a Measure of Economic Inflation

One of the key indicators of economic inflation is wages growth. However, from a consumer's perspective, the more relatable metric is the Consumer Price Index (CPI). If wages were to be frozen, what would happen?

Consumers would either refuse jobs that don't pay enough to live on or take jobs where they can receive bribes, such as procurement officers or logistics officers who accept bribes for specific suppliers or shipping companies. Without labor, products and services would become scarce, and prices would rise due to increased competition for a decreasing supply of goods.

Furthermore, the standard of living for the population would decline, and the remediation provided by freezing wages would likely be insufficient to address the larger economic issues that would arise. To maintain a growing standard of living, wages need to rise faster than inflation, reflecting the growth in the overall economy and people's improved purchasing power.