Answer to Question #114721 in Microeconomics for Rosa

Question

why an increase of the wages above the inflation rate should be turned
down as it is detrimental to the economy?

Answer 1

Yes, it should be turn down because:

Inflation means fall in the value of money. When price rises or the value of money falls,

the effects of inflation on redistribution of income, wealth, production, and on the society as a whole leads to increase in demand and decrease in supply.

Increase in wage may gain the effect of inflation, if their wages adjust to inflation rate. BUT, at the long run, workers lose because by the time wages are raised, the cost of living index may have increased further.

For the Government, increase in wages favour the government because the tax-paying will increase. This can lead to a rise in unit labour costs and lower profits for businesses.