Week 9: Seminar Answers -

Inflation
Based on your knowledge and understanding of inflation please attempt to answer
the following questions in preparation for your next live Zoom session after the
Easter break.
1.  Do you think Unions can influence wage levels and therefore, cause
inflation?

 Yes - in particular industries.  For example, if you are an electrician and

work for a firm which has a union then you may be paid more.  Any wage
demand increases will be passed on to the customer through higher
prices.  Those electricians that are self-employed and do not belong to
union may not raise prices because they can only earn what they can earn
through the customers they see.
 Powerful unions can limit the supply of labour if they control the labour for
that industry.  For example, waste collection in the USA controlled by
unions.  It is the unions that determine the supply of labour.  They can limit
the supply of waste workers which will increase wage levels and costs and
they can increase the supply of waste workers reducing wage levels and
costs. 
 Powerful unions can cause massive destruction in an economy such as
the 1970s in the UK.  Mass strikes and negotiated wage increases by the
unions drove wage levels and prices up.  People wanted a change and a
new government was elected with Margaret Thatcher as the new Prime
Minister.  Her aim was to reduce union power!
 Unions on their own are not the only reason why some countries pay
higher wages than other countries.  Often higher wage levels are
determined by how well an economy is doing e.g. economic growth.
 Also important to note that if unions restrict the labour supply, the workers
will have to do other jobs which will increase the labour supply for that
particular industry.  This in-turn will reduce wage levels and costs.

2.  Why do you think inflation rates have remained low and stable from 2010
onwards?

 People and firms are not expecting interest rates to rise - there is stability
and therefore, less of a reason for prices to increase.
 Firms and their competitors are not expecting costs to rise through higher
interest rates from the borrowing they have done.
 Cheaper products abroad have kept prices competitive generally
(globalisation).
 Public sector wage levels have not increased significantly if at all for
several years (austerity was the argument for this, i.e. the country was in
too much debt and the debt had to be paid back).