A simple model of a reluctant Fed

Imagine there is incipient downward pressure on real wages, just as real wages have fallen in Japan and male real wages have been flat or falling in the United States, both across longer-run periods of time.  Yet for the usual reasons of morale and uncertainty, employers do not wish to cut real (or nominal) wages.  An extra three to four percent price inflation would cut real wages by three to four percent for a large segment of the employed.  It would accelerate a trend which is already underway, and will eventually happen anyway, yet it will telescope a lot of that trend into pre-2012.

There are more employed than unemployed, by a considerable margin, plus many of the unemployed do not vote or do not vote strategically.  The inflation may be a Pareto improvement, desired by benevolent central bankers, but why should an office-holding politician desire this outcome?  Which politician wishes to accelerate a decline in real wages?

Most generally, I suspect that electoral opposition to inflation will rise to the extent median wage stagnation is a problem.


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