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I do not know wages' rise numerically, though the common wisdom is that entrepreneurs are "forced" to raise wages because of "vanishing" qualified workers. Before this summer, the average monthly wage in Lithuania was something like 600 euro, or even less possibly.

But more generally: if inflation is caused by greater capacity and willingness of regular folks to spend more, there should be some time lag before all elasticities work out new price distributions "forced" by greater spending power of consumers. Yet, why does inflation kicks in so suddenly? Even more, if consumers get greater spending power, they won't necessarily increase demand of the basic basket of goods - in the modern world, extra income is massively put into "investments". I don't make a sense of why consumer demand should raise so dramatically when wages rise, but not dramatically at all when they are burning their loans.

But I see the following simple explanation. When entrepreneurs are "forced" to raise wages, they still want to protect the same profits. They might even wish to keep their monetary share from the business bounty, tending to leave employers with still marginal share. The same profit level (or relative share) could be possibly kept by raising prices! It's elementary observation: consumers do not set prices in the modern market, the enterprising side sets prices. A consumer has only the power to buy or not to buy a product for a new price. Whatever elasticities are, inflation statistics do not even register new consumer demand - they register only raising prices.

So apparently, the mechanics of greater wages on inflation is that entrepreneurs tend to seek the same profit (or relative share) even when they have to raise wages. This inclination is especially strong after a long period of cheap worker force. In the textbook economics, consumers would punish enterprisers that raise prices out of proportion to marginal demand. But in the real world, they do not have much choice in limited time. The whole elasticity theory flies out of the window at times of strong inflation. The basic inflation psychology is not that consumers have urgency to spend more, but that entrepreneurs cannot "afford" to keep the same prices.

by das monde on Fri Oct 12th, 2007 at 03:55:05 AM EST
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