Page 97 - 6727

Economic Theory

in a zero inflation world is, in real terms, the same as a 3-percent raise with
5-percent inflation, but workers do not always see it that way. The 2-
percent wage cut may seem like an insult, whereas the 3-percent raise is,
after all, still a raise. Empirical studies confirm that nominal wages rarely

fall.
This finding suggests that some inflation may make labor markets

work better. The supply and demand for different kinds of labor are always
changing. Sometimes an increase in supply or decrease in demand leads to
a fall in the equilibrium real wage for a group of workers. If nominal
wages cannot be cut, then the only way to cut real wages is to allow

inflation to do the job. Without inflation, the real wage will be stuck above
the equilibrium level, resulting in higher unemployment.

Case Study

What Economists and the Public Say About Inflation

As we have been discussing, laymen and economists hold very

different views about the costs of inflation. In 1996, economist Robert
Shiller documented this difference of opinion in a survey of the two
groups. The survey results are striking, for they show how the study of
economics changes a person’s attitudes.

In one question, Shiller asked people whether their “biggest gripe
about inflation” was that “inflation hurts my real buying power, it makes
me poorer.” Of the general public, 77 percent agreed with this statement,

compared to only 12 percent of economists. Shiller also asked people
whether they agreed with the following statement: “When I see projections
about how many times more a college education will cost, or how many

times more the cost of living will be in coming decades, I feel a sense of
uneasiness; these inflation projections really make me worry that my own
income will not rise as much as such costs will.” Among the general

public, 66 percent said they fully agreed with this statement, whereas only
5 percent of economists agreed with it.
Survey respondents were asked to judge the seriousness of inflation as
a policy problem: “Do you agree that preventing high inflation is an

important national priority, as important as preventing drug abuse or
preventing deterioration in the quality of our schools?” Shiller found that
52 percent of laymen, but only 18 percent of economists, fully agreed with

97