Sudden Unprecedented Wage Hike Can Do More Harm Than Good


The demand for money is always greater than the supply for money in the real sense. Now if people want more money will they work more hours ?? Well they don’t. That keeps the demand in control. An inflationary price hike makes the labour market demand for more wages.

  Take a look at how countries falter in monetary decisions. Take India fo example. They made their 6th pay commission in order to deal with the inflationary trends, they suddenly hiked the wages of the govt. employees in 2006. The marginal propensity to consume of an average Indian thus has increased multiple fold, which is obvious due to the 9% growth rate that they registered; favored mostly by a domestic consumption.

   With that case today, they are death close to a toppling due to their inflationary pressures and recurrently high interest rates effecting businesses. The executional blunder was purely the timing. A general increase in the supply of money doesn’t always create the infation.

Example: the countrys GDP is $100 and here the supply of money should be $100 to buy all the commodities.The wages are increased and then there is $ 150 to buy goods worth $100. Here can occur two prolems either the $100 worth of goods are completely sold and there’s an excess still left which will contribute to inflation the next day or only $80 is consumed by too few people who get their hands on the money first. The way out of the tangle is to increase the GDP in proportion to the increase in the wages of the labour market (i.e) $150 today as wages when the GDP is forecasted for a growth of 50% tomorrow which will not create the inflationary problem.

  When the change in income is equal to the change in output it leaves too few blots for a financial collapse. This is not what happened with India. They were hit by a recession the next year which sounded the death knell for their package of goodies for their employees.

©The Idea Bucket, 2013. (submitted by Mikky)