Wages are very flexible around here - most of young people don't have regular contracts, and already earn less than 10k/year. With no benefits, no insurance, no 401k.
In that case, according to Keynesian economics, Italy should have no unemployment. Wages should already have fallen so far that it is now profitable to hire workers.
If Italy does have unemployment with flexible wages, then Keynesian economics must be wrong. In that case, you must agree that gizmo was wrong when he claimed "austerity...leads to...high unemployment...[etc]".
Take it up with gizmo, not me - I'm not a Keynesian. I'm just asking why Keynesians don't follow their theories to their logical conclusions.
I don't know where you are getting your ideas about Keynesian economics and wage policy, but they are almost completely the opposite of what Keynesians believe.
He also argued that to boost employment, real wages had to go down: Nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.
Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (falling prices) can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms. [1]
To summarise, Keynesians generally believe that decreasing wages deceases aggregate demand, which discourages growth.
The general Keynesian to high unemployment during a recession is to increase government stimulus to increase aggregate demand. That approach is problematic in Europe at the moment, as the infographic illustrates.
Um, you quote a passage declaring that according to Keynes, real wages need to go down to boost employment. He says this is difficult because nominal wages are sticky.
How does that differ from what I said?
Note that I wasn't advocating a deflationary spiral, I was advocating a stimulative wage cut while allowing price levels to rise.
It differs because Keynesians also follow the rest of that quote: . However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.
Note the "wage cuts could make matters much worse".
I'm unclear if you think that a "stimulative wage cut" (!!) is Keynesian or not. To be clear: it is not - under no circumstances would a Keynesian think a wage cut is stimulative.
What you are describing is not part of the standard Keynesian theory. The hypothetical death spiral does not follow from the math. If you disagree, could you show how it occurs?
Further, the decrease in real wages caused by stimulus (whether via a nominal cut or inflation) causes AD to increase (and GDP as well), since it puts people back to work. At least, that's what the math says.
I do realize that political pundits posing as economists (including those with Nobel prizes) often ignore the math when they don't like where it leads...
You say "the math says" like it is a math homework formula.
I assume we both know economics isn't like that - it is about statistics, demand curves and velocity of changes across the economy. Sure, an increase in employment increases aggregate demand. But a decrease in wages also decreases aggregate demand.
I always thought the primary belief of Keynesians was that poor aggregate demand led to recessions. Sticky nominal wages was a factor in high unemployment, but it is weak aggregate demand that was where the horns are. Therefor their solution was to pump money into the demand side so that would drive spending. Demand side spending encourages business investment and this jumpstarts the economy.
As far as I know, most economists would argue that if nominal wages weren't sticky, unemployment would be less of a problem. When you say "Italy should have no unemployment", I'm not sure who you are arguing with, but I don't think it is Keynesians.
Same in Portugal but you don't even need to talk about the young people. Average wage is 1000 eur, 700/900 eur would be a good salary for most young people in Portugal.
It's also funny how people talk about the lazy people from the South. I actually work in London and people work much less hours there than in Portugal.
