Posted by: Dirk | September 2, 2014

BoJ’s Koruda: BoJ should set benchmark for wage negotiations

Reuters reports from the Jackson Hole conference of late August, writing that the Bank of Japan’s governor Kuroda has proposed to set benchmarks for wage negotiations:

Low long-term interest rates will likely not rise until the 2 percent target is reached, he said, adding that the BoJ’s 2 percent inflation target, once met, could serve as a benchmark for wage negotiations.

This is quite interesting, because it goes completely against neoclassical thought. This school of economics recommends that government stays out of the market in almost anything, and that higher (real) wages lead to more unemployment. Since neoclassical economics assumes that the inflation rate is determined by the stock of money supply, a rise in nominal wages would increase real wages and hence increase unemployment. Kuroda begs to differ, based on the view that the inflation rate is mostly determined by the change in the nominal wages. More inflation is good because it allows debtors to pay off debt more easily. If my wages are rising 2% a year rather than not at all, it is easier for me to repay any debt that I have contracted.

The comments by Draghi have already been reported in the press, but in case you want to see the ECB president speaking of demand problems again, here is the paragraph from the transcript:

Cyclical and structural factors

Cyclical factors have therefore certainly contributed to the rise in unemployment. And the economic situation in the euro area suggests they are still playing a role. The most recent GDP data confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lacklustre demand. In these circumstances, it seems likely that uncertainty over the strength of the recovery is weighing on business investment and slowing the rate at which workers are being rehired.

I would add that it is not uncertainty over the strength of the recovery which is the problem, it is the certainty that in a situation of lack of demand that is the problem. Maybe Draghi agrees but can’t say that much. After all, his job depends on Merkel and the other heads of state, who constitute the European Council (Wikisource):

11.2. In accordance with the second subparagraph of Article 283(2) of the Treaty on the Functioning of the European Union, the President, the Vice-President and the other members of the Executive Board shall be appointed by the European Council, acting by a qualified majority, from among persons of recognised standing and professional experience in monetary or banking matters, on a recommendation from the Council after it has consulted the European Parliament and the Governing Council.

Nothing on this planet is ‘independent’, and the same goes for the ECB. The power is – at least to some extent – with politics, as it should be. Whether a central bank should be ‘independent’ at all is a different discussion.


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