March 17, 2016

The Fed should first of all get economics right

Comment on MoneyWatch on ‘The Fed Should Allow Wages to Rise’


Standard labor market theory is provably false. To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct employment equation for the economy as a whole is given here.

From this equation follows the employment multiplier. It says roughly*: if the Fed wants an inflation rate of, say, 2 percent and the actual productivity growth is, say, 1.5 percent then the AVERAGE wage rate must rise with 3.5 percent. And there is no use to wait until this miraculously happens, but the Fed has to actively promote a wage increase in those sectors/firms with an above-average profit rate. These sectors then pull the economy out of recession/deflation. This works best when applied worldwide.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* For details see ‘It’s the price mechanism, stupid!

Related 'Deficit spending, helicopter money, and profit' and  'Austerity and the utter scientific ignorance of economists' and 'Have data, lack theory' and 'Going beyond sitcom economics' and 'The labor market and the consistent failure of 101-economics'.