Tom writes: >Deitsch and Dilts pointed out that the COLA clause formulas in use at the >time were scandalously bad at protecting the real incomes of workers, but >they did seem to have the side effects of reducing work stoppages and >weakening union power. Given the inadequacy of the COLA formulas, Deitsch >and Dilts asked, "why has organized labor permitted itself to be manuevered >and manipulated by management?"... >NAIRU (not just MF's) contends that accelerating inflation results from >workers building inflationary expectations into their wage demands. The case >of the COLA clause suggests something quite different: inflationary >expectations appear to have made workers eager for nominal wage "protection" >without being too picky about whether the actual amount of protection was >adequate or about what they had to give up in return for that protection. >Such a response can be regarded as rational, in as much as workers may feel >that they can afford to give up some real wages in return for some >protection against a much larger loss. The problem that this poses to >accelerating inflation hypotheses is that it suggests workers have at their >disposal more than one set of rational responses to inflation, depending on >their tolerance for uncertainty. Some of those responses could even be >counter-inflationary. This is not to rule out the _possibility_ of an >accelerating inflation, only to point out that acceleration can't be >_predicted_ from the model. The MF's theory of the "natural" rate of unemployment argues that real wages should be hurt in the short run by inflation, as in the COLA story above. In his theory, workers suffer from short-term "money illusion" in which they misinterpret their higher money wages as higher _real_ wages and are thus willing to supply more labor despite the actual fall in real wages. My model (which follows Soskice & Carlin much more than the MF) says that as U falls, workers have more bargaining power. (Bargaining power allows workers to put their inflationary expectations into practice.) This says that as U falls, the COLA should improve in quality (where "quality" is defined by workers). But the above research doesn't say anything about changes, only the level of the quality of COLAs at a specific point in time. If COLAs were always bad for protecting real wages, it would indicate that inflation _always_ coexisted with falling real wages. But in the late 1960s, real wages did very well, despite the inflation. BTW, it is the late 1960s experience that is the best case for the profit squeeze theory of inflationary acceleration that I have been talking about. The MF's followers take the example of inflationary acceleration of the late 1960s, misinterpret it, and generalize it to all of history. >But all this chatter about accelerationist models is beside the point I >wanted to make. So what I do is "chatter"? Such flattery will get you nowhere. BTW, Tom, do you think that the US or Canadian economy (as currently organized following capitalist rules) could live with 1 percent unemployment for 10 years without accelerating inflation or price controls? Jim Devine [EMAIL PROTECTED] & http://clawww.lmu.edu/Departments/ECON/jdevine.html
