A staple argument of right-wing opponents of monetary expansion to increase prices and nominal income is that, given high unemployment, inflation will not increase nominal wages, so that increasing prices must reduce real wages. This response is classic faux populism at its worst, as practiced with consummate hypocrisy by the Wall Street Journal editorial page.
What makes this argument so disreputable is not just the obviously insincere pretense of concern for the welfare of the working class, but the dishonest implication that employment in a recession or depression can be increased without an, at least temporary, reduction in real wages. Rising unemployment during a contraction implies that real wages are, in some sense, too high, so that a falling real wage tends to be a characteristic of any recovery, at least in its early stages. The only question is whether the falling real wage is brought about through prices rising faster than wages or by wages falling faster than prices. If the Wall Street Journal and other opponents of rising prices don’t want prices to erode real wages, they are ipso facto in favor of falling money wages.
Here is how Ludwig von Mises, with his unique gift for understatement, put it in his magnum opus, Human Action (3rd ed., p. 789), explaining the connection between real wages and unemployment in the Great Depression.
In the boom period that ended in 1929 labor unions succeeded in almost all countries in enforcing wage rates higher than those which the market, if manipulated only by migration barriers, would have determined. These wage rates already produced in many countries institutional unemployment of a considerable amount while credit expansion was still going on at an accelerated pace. When finally the inescapable depression came and commodity prices began to drop, the labor unions, firmly supported by the governments, even by those disparaged as anti-labor, clung stubbornly to their high-wages policy. They either flatly denied permission for any cut in nominal wage rates or conceded only insufficient cuts. The result was a tremendous increase in institutional unemployment. (On the other hand, those workers who retained their jobs improved their standard of living as their hourly real wages went up.) The burden of unemployment doles became unbearable. The millions of unemployed were a serious menace to domestic peace. The industrial countries were haunted by the specter of revolution. But the union leaders were intractable, and no statesman had the courage to challenge them openly.
In this plight the frightened rulers bethought themselves of a makeshift long since recommended by inflationist doctrinaires. As unions objected to an adjustment of wages to the state of the money relation and commodity prices to the height of wage rates. As they saw it, it was not wage rates that were too high; their own nation’s monetary unit was overvalued in terms of gold and foreign exchange and had to be readjusted. Devaluation was the panacea.
Mises actually describes the situation fairly accurately, if allowance is made for his political extremism and insane anti-inflationism, as if devaluation, in the face of 5 to 10% annual deflation from 1930 to 1933, were the problem not the solution. So if the Wall Street Journal and other opponents of monetary expansion to raise prices and nominal GDP don’t want rising prices to erode real wages, they need to explain how employment is supposed to expand after a depression without a fall in real wages. If they can’t do that, then, by the laws of arithmetic, they, like their hero Ludwig von Mises, must be in favor cutting nominal wages.