Wage Policy as an Essential Ingredient in Job Creation

The Fed has once again announced its plans to attempt to achieve a 6.5 percent unemployment rate with a pledge to keep short-term interest rates near zero until that goal is achieved. And yet, monetary policy is only one piece of what is necessary alongside fiscal policy. Rather what is needed is a robust wage designed to increase earnings so that workers can increase their effective demand for goods and services.
This paper argues that an essential ingredient in job creation is a wage policy. Monetary policy assumes that if interest rates are lowered enough, investment will be stimulated and jobs created. But pumping more money into the economy, in and of itself, will not create jobs. Rather job creation requires a more grassroots approach. Job creation requires that there be aggregate demand for goods and services.
It does not matter how many jobs might be created either through tax reductions or lowering of interest rates if people’s incomes fail to keep up with inflation. Or for that matter, it does not matter how much workers might reduce their wage demands as competitive market theory suggests. It is increases in effective demand for goods and services derived from rising incomes that ultimately drives the need to expand facilities, which results in the creation of new jobs.
First published by M.E. Sharpe
http://www.challengemagazine.com/extra/026_052.pdf in November-December 2012 Challenge Magazine online.