Relative Prices Matter At All Times

by Mario Rizzo

Paul Krugman has written a column stating that wage cuts at this time are a bad idea. Following Keynes he claims that nominal cuts will do no good – they will not stimulate employment (or prevent unemployment) – because aggregate demand will fall. Real wages will thus remain unchanged.  

In part, Keynes directed this argument at a straw man.  The economist Arthur C. Pigou is supposed to have advocated wage cuts as the main cure for recessionary unemployment. This is not trueContinue reading