Wage Moderation Effects

by Dennis Hartman; Updated September 26, 2017

Labor markets play a major role in how economies function and grow. Wage moderation, which was particularly popular throughout Europe during the late 20th century, refers to a policy of keeping workers' wages at a slow pace of growth, sometimes just slightly above the pace of inflation. Unions, governments and industrial leaders may all call for wage moderation as a means to achieve greater economic stability or a competitive advantage.

Employment

The largest positive theoretical effect of wage moderation is a reduction in unemployment. By reducing the raises that current workers receive, businesses have more money to spend on expanding their workforces. Wage moderation also prevents workers from reaching high wage levels that make them targets when a business needs to cut costs to keep its profits up. Less unemployment means that governments pay out fewer unemployment benefits, strengthening social welfare programs.

Inflation

Wage moderation is also directly linked to inflation, which is the rise in prices that occurs naturally in an economy under certain conditions. Workers who are part of an economy with a wage moderation policy have reduced spending power, which prevents merchants from raising the prices of goods beyond the levels that customers can afford. Low prices for consumers translate into economic stability and strengthen a currency relative to other currencies in use where inflation causes prices to rise.

Union Concessions

Labor unions must agree to wage moderation efforts, which run counter to some union goals such as guaranteed cost-of-living wage increases for members and fair wages throughout an industry. However, wage moderation does not mean that workers' wages freeze. Instead, workers experience wage increases that may be slower than what they would receive in an unregulated system. This means decreased spending power for workers, though slower inflation can moderate the effects of reduced earnings.

Global Competitiveness

Wage moderation strategy can help a national economy or economic region compete favorably against other economies in other parts of the world. This results, in part, from wage moderation's more direct effect on inflation. For example, wage moderation in Europe that keeps the price of European goods low makes those goods more attractive to American consumers, who compare European goods to domestic goods that are subject to rising prices from American inflation. This leads to a shift in trade balance, as Americans seek more low-cost goods from Europe, adding money to the European economy.