"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Shameful Rate of Unemployment in the EMS 257
The history of Spanish inflation and unemployment is very similar, almost a
caricature of Italy, typically with some lags; pushing by labor was even more
extreme and was accompanied by more damaging measures, especially in the area
of industrial relations and job protection. It is not surprising that unemployment
in Spain in recent years has reached nearly twice the gigantic Italian level.
4.5.2 The Great Oil Crises
Another important example of real wage targets and the accommodation dilemma
is provided by the oil crises. One must first begin with the consideration that the
real target wage which is relevant is the one in terms of domestic output prices
(the real wage in terms of domestic output). What actually happened is that
workers endeavored to push wages in order to maintain a stable purchasing power
in terms of consumables. But since those prices, which included energy, rose more
than the prices of domestic goods, wages were meant to rise relative to domestic
goods. As the rise was not compensated by higher productivity, it would have
meant a shift in the income distribution to compensate labor for the Sheik tax.
But there was no reason why employers should have accepted such a redistribution.
Since they controlled prices, the rise in unit labor cost was largely passed
on to higher prices of domestic output. Accordingly, the rational solution would
have required maintaining unchanged the nominal wage, thus preventing inflation.
Real wages would of course have declined immediately by an amount
reflecting the Sheik tax. But that loss could not be avoided if workers successfully
pushed for higher nominal wages to maintain a stable purchasing power in
terms of commodities, as actually happened. The superimposition of domestic
inflation on imported inflation initially led to a price-wage spiral but with an
initial phase of acceleration. Between 1972 and 1975, the average rate of price
inflation for the 12 older members of the EC rose from 6 1 / 2 to 14 percent and that
of wage inflation from 11 1 / 2 to 19 percent.
These developments confronted the authority with the usual cruel dilemma.
However, during that episode there was less and less willingness to accommodate,
as price stability came to be more generally accepted as the first priority,
with the responsibility for enforcing it falling on the central bank.
So the inflationary spiral was accompanied by rapidly rising interest rates
decreasing investment and output, and rising unemployment. These developments,
together with a slowdown of imported relative to domestic inflation, eventually
resulted in a gradual decline of inflation back to 10 1 / 2 percent, in 1978, but
at the cost of a substantial rise in unemployment from 2.7 to 5.1 percent. So the
period 1973–1978 was characterized by the combination of high unemployment
and high inflation that has since come to be known as “stagflation”—it rises from
the fact that the policy of non-accommodation designed to reduce inflation