Assume that you are on the collective bargaining panel discussing the wage talks representing the employers....

Assume that you are on the collective bargaining panel discussing the wage talks representing the employers. What are some points you will use to defend the employers on why an increase of the wages above the inflation rate should be turned down as it is detrimental to the economy?

Solutions

Expert Solution

Increasing the wages of the workers above the inflation rate may not produce real benefits in the longer run. As workers see their wages have risen, they will increase their purchases. Aggregate demand will rise and so will the price levels. Thus inflation will ultimately catch up and wipe all the real gains for the workers.

Increasing real wages will increase the cost of production for the firm. If the economy enters a downturn, this will be extremely problematic as the industry will be fighting for survival. Increased wages can not be turned back (workers can still accept constant wages but they will not accept falling wages) and this will create increased pressure on the firms. As a result, many will go out of business and increase their layoffs. This will impact the workers negativey as they are at a higher risk of losing jobs than would have been the case if wages increased in line with inflation.

Rahul Sunny answered 1 month ago

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