Real wage cuts in the UK recession (a questionnaire of sorts)

2008 and after: -8.5%

That measure of wage decline is from John van Reenen (pdf, useful powerpoints on UK productivity), citing Martin and Rowthorn (2012).

Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both.  I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.

I would, however, like to get a handle on Keynesian thinking here and thus the questionnaire aspect of this post.  In the traditional Keynesian story, stimulus lowers real wages through nominal reflation.  Is that the Keynesian view here?  If so, why do Keynesians believe that British real wages need to fall more than 8.5%  Why did they need to fall 8.5% to begin with?

I understand this view and accept it in part myself: “Real wages in the UK were way too high to begin with because the country was producing well above potential output.”  Yet Keynesians have been very unwilling to make that argument.

I also have seen Keynesian-style thinkers argue that inflation will make labor markets tighter and raise real wages.  This is either incoherent or at the very least underargued (there is a possible version of the view if you think prices are nominally sticky but wages are not).

In a multiple equilibria view, new information is revealed about the British economy from the financial crisis, and that economy collapses to a lower trust/productivity/risk-taking point, plus it loses some relative weight in its high productivity sectors, such as finance.  That too I understand and also partially accept, though again I don’t see current Keynesians pushing that line (though it need not run counter to Keynesianism, broadly construed).

I also understand what it would look like to mix Keynesianism with an extreme form of a stagnation theory, more extreme than I hold myself.  But again, I just don’t see that view out there.

So what is the current Keynesian view on why British real wages need to be falling so much?  I would like to better understand the alternatives to my views.

I appreciate your help in the comments.

Addendum: Scott Sumner offers very good commentary.


Comments for this post are closed