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Lower unemployment using deflation and the backward bending supply curve of labor

Sequentially, deflation would raise real wages, which would shorten the average work week, which would spur new hiring.  Contrary to the deflation=depression mantra of mainstream economics, evidence suggests that deflation and prosperity can co-exist, and in fact deflation raises real wages (I wrote about it here:  https://seekingalpha.com/article/207254-what-s-the-cost-of-an-inflation-free-bank-bailout).  The backward bending supply curve of labor argues that as wages increase past a certain point, people work fewer hours.  It has also been estimated that for every 6 minutes the average work week is shortened, 315,000 new employees must be hired to replace the lost output (http://m.cnbc.com/us_news/37552106/1). 

The backward bending supply curve of labor explains the concept that for most people there is a point at which additional leisure time brings more pleasure than an additional car, or house.  It states that as wages increase workers will initially work more hours due to the substitution effect making labor more valuable relative to hours not worked.  But past a certain point the income effect dominates as workers can achieve their desired level of consumption/living standard making leisure time more valuable.  

 
Essentially it says that money can't buy you happiness past a certain point, but up until that point it does.  A study showed for most people that point is about $100,000/year.  http://www.princeton.edu/main/news/archive/S15/15/09S18/index.xml?section=topstories  "Money does make a difference when it moves you from abject poverty into the middle class, but it stops making a large difference at about that point. In terms of happiness, the difference between making $5,000 a year and $50,000 a year is dramatic, but the difference between making $100,000 and $100 million is negligible, almost nonexistent."-Nobel Prize-winning psychologist Daniel Kahneman

As wages increase to the backwards bending portion of the curve, hours worked decline.  In order for the economy and employers to maintain the same level of output unemployed workers must become employed workers.  Think France's 35 hr work week, or Germany's 4 day work week, only instead of coming from a government decree, it arises from free market forces currently being crushed by central planning (banking).  While working less, earning more, and lowering unemployment may sound too good to be true, we must remember that the primary affect of inflation or deflation is not on national output but on national income distribution.

The idea of a shorter work week to reduce unemployment is not new.  The idea that those shorter weeks could be achieved through free market banking is.


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