Friday, March 2, 2012

Powerful syndicates and strikes affect inflation?

Do they increase inflation, do they decrease inflation or have no impact?Powerful syndicates and strikes affect inflation?
Not got any answer as yet. Maybe it is not very clear what is the motivation of your question and the context in which you are asking. In Economics every thing depends on almost every other things. So, we make generally partial equilibrium analysis to see the impact of a change in one/ two variable/s on some one or two other variables, while keeping other variables constant. But your questions are too openended as in the medium term many things change.

So, I try to give clues.

In the medium term, no artificial barriers to competition work in a competitive market economy. If there is Oligopolistic cartel of business enterprises, they can raise prices for a while, but as prices rise the producers with lower market shares try to clandestinely break the cartel agreement by selling more quantities than has been agreed for them under cartel arrangement. Cartels or syndicates succeed only as long as there is shortage of capacity relative to supply: but higher prices bring in more supply from alternative sources and substitutes to reduce excess of demand over supply, thus reducing the initial short-term imflationary pressures. If there is excess capacity already syndicates last for even shorter period as the members of the cartel sell more than their agreed quota to increase their profit. So, in the medium term, the syndicates and cartels fail to impact the medium term inflation rate. The same is true of labor / worker unions. They may go on strike for higher wages and compensation. That may succeed in raising their wages, especially ion a period of bouyancy/ boom in the economoc activities leading to a shortage of labor. But there are trade cycles. Aggregate demand may fall after some time resulting in lower output, companies/ fsactories getting into losses and unviable position and even shutting down plants/ closing down operations. This would result in higher unemployment and labor would be willing to work for lower wages elsewhere. So, the cost push effect of rise in wages through collective bargaining using strikes may happen in the short-term but in the medium term this may be offset because of the fall in demand due to wage-price spiral and consequent closure of factories and companies leading to unemplyment. Just see what happened to the General Motors labour after the fincial crises accentuated the Great Recession that started in 2008.

In the medium term, many things changes: new technologies come to increase efficiency, reduce demand for inputs and outputs, the Govt. policies change to ease supply constarints or moderate demand or curb monopolitic/ oligopolistic behavior by firms, new enterpreneurs join the market. companies outsouce business processes to reduce costs by getting things done elsewhere where labor is cheap. As a result, strikes and powerful syndicates can have limited power and lose power as time progresses.

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