Gambling Wages Away

30 June, 2009

Why is it that wages exhibit backward inertia? How come workers don’t demand that their wages be tied to inflation, and instead just take their chances with fixed nominal wage contracts? In their book Animal Spirits, George Akerlof and Robert Shiller discuss (amongst much else) the phenomenon of ‘money illusion’.

They argue that people are not perfectly rational when it comes to inflationary expectations and consequence wage demands, supported by empirical evidence. However, there may be more conventional explanations for the behaviours they observed.

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