Comments on: Shortage of Labour and Inflation http://www.economicshelp.org/blog/economics/shortage-of-labour-and-inflation/ Economics Blog - current events and economics essays Thu, 18 Mar 2010 19:46:30 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Ralph Musgrave http://www.economicshelp.org/blog/economics/shortage-of-labour-and-inflation/comment-page-1/#comment-2893 Ralph Musgrave Fri, 13 Mar 2009 18:45:27 +0000 http://www.economicshelp.org/blog/?p=1405#comment-2893 Labour shortages are absolutely fundamental to inflation in the sense that near full employment, firms are short of LABOUR rather than anything else e.g. materials or capital equipment. For example when unemployment declines from a moderately disastrous level (say 10%) to about the lowest it can go (say 3%), there is NOT a dramatic rise in firms which are constrained by lack of CAPITAL EQUIPMENT. Failure to appreciate this fundamental point can lead to mistakes. For example it is claimed above that inflation can be avoided if employers have monopsony powers. It is very unrealistic to suppose that a significant proportion of employers do have these powers, but let’s say they do, because this gives rise to an interesting theoretical question, as follows. Say in an economy consisting purely of “monopsony firms”, demand is so high, that these firms cannot meet the demand. What happens? Either prices rise. Or given the abundance of excess demand sloshing around, new firms enter the market, and the monopsonists lose their quasi-monopoly powers. What other possibilities are there? Labour shortages are absolutely fundamental to inflation in the sense that near full employment, firms are short of LABOUR rather than anything else e.g. materials or capital equipment. For example when unemployment declines from a moderately disastrous level (say 10%) to about the lowest it can go (say 3%), there is NOT a dramatic rise in firms which are constrained by lack of CAPITAL EQUIPMENT.

Failure to appreciate this fundamental point can lead to mistakes. For example it is claimed above that inflation can be avoided if employers have monopsony powers. It is very unrealistic to suppose that a significant proportion of employers do have these powers, but let’s say they do, because this gives rise to an interesting theoretical question, as follows.

Say in an economy consisting purely of “monopsony firms”, demand is so high, that these firms cannot meet the demand. What happens? Either prices rise. Or given the abundance of excess demand sloshing around, new firms enter the market, and the monopsonists lose their quasi-monopoly powers. What other possibilities are there?

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