Hein, Eckha d
A icle
In la ion is always and e e ywhe e … a con lic phenomenon: pos -
Keynesian in la ion heo y and ene gy p ice d i en con lic in la ion,
dis ibu ion, demand and employmen
Eu opean Jou nal o Economics and Economic Policies: In e en ion (EJEEP)
P o ided in Coope a ion wi h:
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Sugges ed Ci a ion: Hein, Eckha d (2024) : In la ion is always and e e ywhe e … a con lic
phenomenon: pos -Keynesian in la ion heo y and ene gy p ice d i en con lic in la ion,
dis ibu ion, demand and employmen , Eu opean Jou nal o Economics and Economic Policies:
In e en ion (EJEEP), ISSN 2052-7772, Edwa d Elga Publishing, Chel enham, Vol. 21, Iss. 2, pp.
202-231,
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In la ion is always and e e ywhe e …a con lic
phenomenon: pos -Keynesian in la ion heo y
and ene gy p ice d i en con lic in la ion,
dis ibu ion, demand and employmen
Eckha d Hein
Ins i u e o In e na ional Poli ical Economy (IPE), Be lin School o Economics and Law, Be lin, Ge many
[email p o ec ed]
This pape e iews he pos -Keynesian heo y o in la ion agains he backg ound o he simul a-
neous ise in in la ion and p o i sha es in he cou se o he COVID-19 eco e y and he Russian
wa in Uk aine. I dis inguishes be ween he Keynes, Kaldo , Robinson, and Ma glin adi ion,
and he Kalecki, Row ho n, and Du adi ion. Two p o o ype models in he la e adi ion —
he Du , Blecke –Se e ield and La oie a ian , and he Row ho n and Hein–S ockhamme
a ian —a e discussed. The pape applies he la e o elucida e ecen in la ion ends p opelled
by inc easing impo ed ene gy p ices and hen ising ma k-ups. The e ec s o in la ion- a ge ing
cen al bank in e es policies e sus a pos -Keynesian al e na i e mac oeconomic policy app oach
a e e alua ed. I is a gued ha om a pos -Keynesian pe spec i e in la ion is always and e e y-
whe e a con lic phenomenon, wi h di e en po en ial igge s. Adequa e policies should hus
ocus on mode a ing dis ibu ion con lic by incomes policies, complemen ed by cen al banks
a ge ing low long- e m eal in e es a es, unc ional inance iscal policies and in e na ional
coo dina ion o in la ion a ge s.
Keywo ds: con lic in la ion, pos -Keynesian models, impo ed ene gy in la ion shock
JEL codes: E12, E25, E31, E61
1 INTRODUCTION
Wi h he ise in in la ion since 2021, he deba e on he causes o in la ion has been back on
he agenda in economic esea ch and in economic policies. Se e al empi ical s udies ha e
a gued ha he ise in in la ion in he cou se o he eco e y om he COVID-19 c isis
and he Russian wa in Uk aine has been associa ed wi h ising p o i s o ising p o i sha es
in se e al coun ies, no only in he USA (Bi ens 2022; Dullien e al. 2023; Fe guson/
S o m 2023; Konczal/Lusiani 2022; Ma ama os 2023; S igli z/Regmi 2023; Ragni z
2022; S o m 2022a, 2022b; Tölgyes/Piecek 2023). Se e al causes o his ha e been pu
o wa d: highe impo p ices, highe ene gy p ices, bo lenecks due o dis up ions in global
alue chains in he p oduc ion o goods, highe ma k-ups o i ms o se e al easons, and
changes in he s uc u e o demand. Webe /Wasne (2023) ha e p obably been mos p o-
minen in a guing he cu en in la ion can bes be unde s ood as p o i -d i en in la ion o
In i ed A icle
This is an open access wo k
Recei ed 10 Feb ua y 2024, accep ed 30 Ap il 2024
Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2, 2024, pp. 202–231
Fi s published online: June 2024; doi: 10.4337/ejeep.2024.0135
Jou nal compila ion © 2024 Edwa d Elga Publishing L d
© 2024 The Au ho
as ‘selle s’in la ion’, as opposed o (go e nmen spending d i en) excess agg ega e demand
d i en o excess money supply d i en in la ion. They ha e dis inguished h ee s ages o he
p ocess owa ds ising in la ion a es:
(1) Rising p ices in sys emically signi ican ups eam sec o s due o commodi y ma ke dynamics
o bo lenecks c ea e wind all p o i s and p o ide an impulse o u he p ice hikes. (2) To p o-
ec p o i ma gins om ising cos s, downs eam sec o s p opaga e, o in cases o empo a y
monopolies due o bo lenecks, ampli y p ice p essu es. (3) Labo esponds by ying o end
o eal wage declines in he con lic s age. (Webe /Wasne 2023: 183)
O cou se, hese obse a ions con adic he mone a is explana ion o in la ion, based
on Mil on F iedman’s (1970: 24) amous saying ha ‘(i)n la ion is always and e e y-
whe e a mone a y phenomenon in he sense ha i is and can be p oduced only by a
mo e apid inc ease in he quan i y o money han in ou pu ’. In his con ibu ion,
we will hus discuss how he ecen obse a ions o ising in la ion and ising p o i s
o p o i sha es can be in e p e ed om he pe spec i e o he pos -Keynesian heo y
o in la ion. In opposi ion o he mone a is iew, he pos -Keynesian app oach can
be summa ised by a guing ha in la ionisalwaysande e ywhe eacon lic phenomenon
in he sense ha i can only be gene a ed i he claims on eal income by di e en g oups
pe sis en ly exceed eal ou pu .Alsoinsome a ian so NewKeynesianeconomics,in la-
ion has been modelled as con lic in la ion, o example in he ex book p esen a ions in
Blancha d (2017) and Ca lin/Soskice (2009, 2015), and ecen ly by Be nanke/Blancha d
(2023) and Lo enzoni/We ning (2023).
1
As will be explained om di e en pos -Keynesian pe spec i es in his pape , in la ion as
a pe sis en p ocess hus equi es inconsis en claims o he main g oup o ac o s, which may
hen be modi ied by in la ion expec a ions. These can be b oadly dis inguished as ollows:
(1) capi alis s’claims, including i ms, en ie s and landowne s, on uni p o i s o he p o i
sha e, including e ained p o i s, in e es , di idends, and en s; (2) wo ke s’claims on he
eal wage o he wage sha e; (3) go e nmen ’s claims in e ms o ne ax e enues; and (4) he
ex e nal sec o ’s claim ia he alue o impo s o he domes ic economy. In la ion may hus
be igge ed by an inc ease in claims o one o mo e o hese g oups o ac o s, which is no
ma ched by a decline o he claims o any o he g oup o ac o s.
In la ion may hence be gene a ed (1) by an inc ease in capi alis s’ eal p o i s o p o i
sha e claims, igge ed by excess demand, changes in he deg ee o p ice compe i ion, o
highe in e es o di idend claims, which will gene a e p o i -d i en con lic in la ion. I
may be gene a ed (2) by an inc ease in wo ke s’ eal wage o wage sha e claims, igge ed
by changing ba gaining condi ions in he labou ma ke (employmen , wage ba gaining
and labou ma ke ins i u ions), which will gi e ise o wage-d i en con lic in la ion. I
may be gene a ed (3) by an inc ease in go e nmen claims, execu ed by a change in
axes, social ans e s and subsidies, which will gene a e ax-d i en con lic in la ion. Finally,
i may be gene a ed (4) by a change in he claims o he ex e nal sec o , hence ising impo
p ices o a nominal dep ecia ion o he domes ic cu ency, which will gene a e ex e nal cos /
impo p ice d i en con lic in la ion. I he claims o any ac o ise, his will only lead o a
ise in ela i e p ice/wage le els. I o he ac o s accep he ela ed change in income dis i-
bu ion, no pe sis en in la ion will eme ge, bu jus an inc ease in ela i e p ice/wage le els.
Only i o he ac o s do no accep he dis ibu ion e ec s o he change in claims, in la ion
will a ise as a pe sis en p ocess. In his sense, in la ion is always and e e ywhe e a con lic
1. See La oie (2024a), Row ho n (2024) and Summa/B aga (2020) o discussions and
assessmen s.
In la ion is always and e e ywhe e …a con lic phenomenon 203
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
phenomenon, and he dis inc ion be ween di e en ypes o in la ion (demand-pull, cos -
push, impo ed, e c.), also qui e widesp ead in he pos -Keynesian li e a u e, can only
ela e o he igge bu no o he essence o in la ion.
In wha ollows we will elabo a e on his pos -Keynesian iew on in la ion. We will
s a by dis inguishing wo adi ions o pos -Keynesian in la ion heo y acco ding o
he di e en de e mina ion o he p o i sha e claims o he capi alis s. In Sec ion 2,
we will ou line he Keynes, Kaldo , Robinson and Ma glin adi ion, in which he p o i
sha e claims a e a ec ed by excess demand in he goods ma ke , assuming no mal a es o
u ilisa ion o p oduc i e capaci ies and demand de e mined p ices in his ma ke . Sec ion
3 will hen u n o he Kalecki, Row ho n and Du adi ion, in which he a e o capa-
ci y u ilisa ion is a iable beyond he sho un, indus ial and se ice sec o p ices a e
cos -de e mined and he p o i sha e claims a e hence a ec ed by he de e minan s o
he ma k-up and he s uc u e o inpu s. In his sec ion, we will ou line wo p o o ype
pos -Keynesian/Kaleckian in la ion models. The i s is he Du , Blecke –Se e ield
and La oie a ian , which de i es a s able upwa ds sloping Phillips cu e and a s able
p o i -squeeze dis ibu ion cu e. The second is he Row ho n and Hein–S ockhamme
a ian , in which in la ion and dis ibu ion a e only cons an a he employmen a e p o-
iding consis en income claims, while inconsis en claims gene a e changes in in la ion
and dis ibu ion, wi h des abilising eedback e ec s on agg ega e demand and employ-
men . Sec ion 4 will hen in oduce he e ec o ising impo ed ene gy p ices in o he
Row ho n, Hein–S ockhamme a ian and discuss di e en economic policy esponses.
Sec ion 5 will summa ise and conclude.
2 POST-KEYNESIAN THEORY OF INFLATION I: THE KEYNES, KALDOR,
ROBINSON TRADITION AND MARGLIN’S RECONCILIATION OF REAL
WAGE RESISTANCE AND THE PRINCIPLE OF EFFECTIVE DEMAND
The i s s and o pos -Keynesian heo ies o in la ion goes back o Keynes (1930, 1936),
Kaldo (1955/56, 1957) and Robinson (1956, 1962), and has hen been modelled in
Ma glin’s (1984) syn hesis o Keynesian and Ma xian elemen s in he heo y o dis ibu ion
and g ow h. I is assumed ha i ms ope a e a he no mal o a ge a e o u ilisa ion o p o-
duc i e capaci ies gi en by he capi al s ock and ha changes in demand hus igge changes
in p ices. Ta ge p o i sha es o i ms a e hus a ec ed by excess demand in he goods ma ke .
Wi h he economy ope a ing a he no mal o a ge a e o u ilisa ion, lexible p ices in he
goods ma ke ela i e o s icky nominal wages allow sa ing o adjus o in es men h ough a
a ia ion in income dis ibu ion, i he p opensi y o sa e ou o p o i s exceeds he p opensi y
o sa e ou o wages. The inc ease in p ices will hen be a empo a y equilib ium adjus men
phenomenon. In la ion as a pe sis en p ocess only a ises i wo ke s esis e-dis ibu ion, as
Kaldo (1959: 292, emphasis in o iginal) has poin ed ou :
Wi hou a con inued ise in money wages in la ion could no go on as a p ocess in ime –since
wha e e o ces we e p esen in he economy making o a ise in p ices, hey could only ha e
caused a once-and- o -all ise in p ices which would in i sel ha e se ed o elimina e he excess
demand ha ga e ise o i .
2.1 Keynes: income and p o i in la ion
The oo s o his app oach can be ound in Keynes’s (1930: ch. 10) ‘Fundamen al equa-
ions o he alue o money’in A T ea ise on Money. The e, he p ice le el in a closed
economy is de e mined by ‘ he a e o e iciency ea nings’(cos s o p oduc ion including
204 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
no mal capi al cos s) and he di e ence be ween in es men and sa ing pe uni o ou pu ,
i.e. excess demand in he goods ma ke :
2
p¼WþΠn
YþpI −S
Y¼w
yþ n þpI −S
Y;(1)
wi h p o he p ice le el, W o wages, Y o eal ou pu , Π
n
o no mal p o i s a he
goods ma ke equilib ium (pI =S), I o eal in es men , S o nominal p i a e sa ing, w
o he nominal wage a e (w=W/L), y o labou p oduc i i y (y=Y/L), L o labou
inpu ,
n
o he no mal a e o p o i a he goods ma ke equilib ium (
n
=Π
n
/K), ela ed
o he no mal a e o u ilisa ion assumed o be equal o uni y he e (u
n
=Y/Y
p
= 1), o
he capi al–po en ial-ou pu a io ( =K/Y=K/Y
p
), K o he capi al s ock and Y
p
o
po en ial ou pu gi en by he capi al s ock. Keynes (1930: 155) hen dis inguishes
be ween ‘income in la ion’and ‘p o i in la ion’. While income in la ion (o de la ion)
is caused by changes in he a e o e iciency ea nings, p o i in la ion (o de la ion) is
caused by he inequali y o sa ing and in es men and hence by excess demand in he
goods ma ke .
In he chap e on ‘The heo y o p ices’in he Gene al Theo y, Keynes (1936: ch. 21)
makes a simila dis inc ion. He e, he e e s o ‘semi-in la ion’, caused by discon inuous
inc eases in wage uni s below ull employmen , de e mined by he psychology o wo ke s
and by policies o employe s and ade unions, and o ‘absolu e ( ue) in la ion’, igge ed
by an inc ease in e ec i e demand a ull employmen , i.e. by excess demand, causing ises
in p ices and money wages (Keynes 1936: 301–302).
Keynes’s (1930: ch. 10) undamen al equa ion o he alue o money can be ex ended
o he open economy wi h a go e nmen (Heine/He 2023: ch. 9), assuming ha he
domes ic economy impo s aw ma e ials and semi- inished p oduc s om he es o
he wo ld. These en e domes ic p oduc ion which is hen pa ly expo ed:
p¼Wþap MþΠn
YþpI −SþG−TþpX −ap Z
Y
¼w
yþap μþ n þpI −SþG−TþpX −ap Z
Y;
(2)
wi h a o he nominal exchange a es (uni s o domes ic cu ency pe uni o o eign cu -
ency), p
o he o eign p ice le el, M o impo ed aw ma e ials and semi- inished p o-
duc s, G o nominal go e nmen expendi u es, T o nominal ax e enues, X o eal
expo s, Z o eal impo s, and μ o he aw ma e ial and semi- inished inpu –ou pu
a io (μ=M/Y). As can be seen om equa ion (2), a domes ic cu ency dep ecia ion
o a ise in impo p ices has an ambiguous e ec on he domes ic p ice le el and
hence in la ion. I aises he equilib ium p ice le el h ough an inc ease in cos s, bu i
lowe s he disequilib ium p ice componen h ough a leakage o demand and hence
h ough lowe ing excess demand. Howe e , he in e ac ion be ween income and p o i
in la ion in Keynes’s wo k, o be ween semi- and absolu e in la ion, emains somewha
unclea . So a , we only ha e a dis inc ion be ween di e en causes o a change in he
p ice le el, which migh gene a e in la ion.
2. Keynes (1930: ch. 10) p esen s his sepa a ely o consump ion and in es men goods, bu
he e we assume jus one hyb id good.
In la ion is always and e e ywhe e …a con lic phenomenon 205
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
2.2 Kaldo and Robinson: lexible p ices p o ide long- un equilib ium adjus men
wi h eal wage esis ance leading o an in la ion ba ie
In Kaldo ’s (1955/56) ‘Keynesian heo y o dis ibu ion’, changes in he p ice le el ela i e
o nominal uni labou cos s, and hence changes in unc ional income dis ibu ion, e a-
dica e excess demand and e u n he sys em o an I-S g ow h equilib ium in he long
un, p o ided ha he p opensi y o sa e ou o p o i s exceeds he p opensi y o sa e
ou o wages. Robinson (1956, 1962) has pu o wa d simila models. While Kaldo
assumed no mal u ilisa ion o p oduc i e capaci ies gi en by he capi al s ock and ull
employmen , Robinson only assumed he o me bu no he la e . Bo h app oaches
show ha Keynes’s p inciple o e ec i e demand, i.e. ha in es men is independen o
sa ing and he la e adjus s o he o me , is also alid o long- un g ow h models.
A basic ex book e sion o he Kaldo –Robinson pos -Keynesian dis ibu ion model is
p esen ed in Figu e 1.
3
I is assumed ha in he long un he a e o capaci y u ilisa ion is
a he i ms’ a ge o no mal a e (u
n
). Wi h gi en echnical condi ions o p oduc ion and
a gi en capi al–po en ial-ou pu a io (
V), he a e o p o i ( ) and he wage sha e (Ω) a e
hus in e sely ela ed, as shown in he uppe -le quad an . In he uppe - igh quad an we
ind he a e o capi al accumula ion as de e mined by animal spi i s and he a e o p o i
(g¼I/K¼αþβ ). Assuming he p opensi y o sa e ou o wages o be ze o, he sa ing
a e, he a io o sa ing ou o p o i s (S
Π
) o he nominal capi al s ock (pK ), is de e mined
σ = sΠ
g(α, )
* =
p
g,
σ
g* = σ*
Ω*= ΩF
T
F
T
Ω
= (1 − Ω)un
g, σ
g* = σ*
p(g − σ, w)
Figu e 1 The pos -Keynesian Kaldo –Robinson dis ibu ion and g ow h model
3. Fo mo e ex ensi e p esen a ions o he Kaldo –Robinson i s gene a ion pos -Keynesian dis-
ibu ion and g ow h models, see Blecke /Se e ield (2019: ch. 3), Hein (2014: ch. 4) and La oie
(2022: ch. 6), o example.
206 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
by he p opensi y o sa e ou o p o i s (s
Π
) and he p o i a e (σ¼S
Π
/pK ¼s
Π
). The
equilib ium o accumula ion a e and sa ing a e de e mines he i ms’ a ge a e o p o i
(
TF
) and equilib ium dis ibu ion, i.e. he equilib ium p o i a e ( *) and he ela ed equi-
lib ium wage sha e (Ω*), which is equal o he i ms’ a ge wage sha e (Ω
TF
), as well as
equilib ium accumula ion and g ow h (g*). Highe animal spi i s lead o highe equili-
b ium accumula ion and g ow h, a highe equilib ium p o i a e and a lowe wage
sha e. A highe p opensi y o sa e ou o p o i s has he ad e se e ec s, hence lowe equi-
lib ium accumula ion and g ow h, a lowe p o i a e and a highe wage sha e. The pa a-
dox o sa ing is hus alid in he long un, oo. The adjus men owa ds he long- un
g ow h equilib ium is shown in he lowe - igh quad an : i akes place ia p ice in la ion
(^
p)i g>σand ia p ice de la ion i g<σ, assuming igid wages (w) and nominal uni
labou cos s. In la ion and de la ion a e hus equilib ium adjus men phenomena and u n
o ze o in he new equilib ium.
The adjus men owa ds such a long- un dis ibu ion and g ow h equilib ium can be
blocked, i wo ke s esis lowe ing he eal wage a e and he wage sha e below some
con en ional le el. Such a eal wage esis ance may hen lead o an in la ion ba ie ,
as poin ed ou by Robinson (1956: 48–50; 1962: 58–59) and shown in Figu e 2.
4
g(α, )
F
T
W
T
W
T
ΩΩ
F
T
Ω
=(1 − Ω)un
σ = sΠ
p
g* = σ*g,
σ
p(g − σ, w)
g* = σ*g, σ
Figu e 2 The pos -Keynesian Kaldo –Robinson dis ibu ion and g ow h model: he in la ion
ba ie
4. Kaldo (1959) has also endogenised wo ke s’wage sha e a ge s, a guing ha high p o i s may
induce wo ke s o y o sha e in ising p o i s, igge ing a p o i –wage–p ice spi al.
In la ion is always and e e ywhe e …a con lic phenomenon 207
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
The a ge p o i a e o i ms (
TF
), gi en by he goods ma ke equilib ium, and he a -
ge p o i a e o wo ke s (
TW
), gi en by hei a ge wage sha e (Ω
TW
), a e inconsis en .
The e o e, he goods ma ke equilib ium canno be a ained, and we will ge a p ice–
wage–p ice spi al ed by pe sis en excess demand in he goods ma ke , which gene a es
p ice in la ion, and eal wage esis ance o wo ke s in he labou ma ke , which gene a es
wage in la ion (^w). I he e is eal wage esis ance o wo ke s, a p ice–wage–p ice spi al
may also be igge ed by cu ency de alua ions, as poin ed ou by Robinson (1938) in
he explana ion o he g ea Ge man in la ion o 1922–1923, o by ising p ices o
impo ed commodi ies, as poin ed ou by Kaldo (1976), as a cause o ising p ice
and wage in la ion in he de eloped capi alis economies in he ea ly/mid 1970s.
2.3 Ma glin: he econcilia ion o eal wage esis ance and he p inciple o e ec i e
demand in a hyb id model
While inconsis en dis ibu ion a ge s o wo ke s and i ms in he Kaldo –Robinson
pos -Keynesian dis ibu ion and g ow h model lead o p ice–wage–p ice spi als and
hence o ising a es o in la ion, Ma glin (1984) has p o ided a e sion o he
model which gene a es cons an in la ion i a ge s o wo ke s and i ms a e inconsis-
en , and in which an ‘in la ion ba ie ’no longe exis s. He calls his a hyb id
model wi h Ma xian ea u es, wo ke s y o de end a a ge eal wage a e o wage
sha e, and pos -Keynesian ea u es, capi alis s’ a ge p o i a e is de e mined by agg e-
ga e demand in he Kaldo –Robinson way. This o e de e mined model is p esen ed in
Figu e 3. The assump ion o he economy ope a ing a he no mal a e o capaci y u i-
lisa ion and he de e minan s o in es men and sa ing a e he same as in he uppe
quad an s o Figu e 2, which ep esen s he ex book e sion o he pos -Keynesian
Kaldo –Robinson dis ibu ion and g ow h model. The c ucial change can be ound
in he lowe - igh quad an , whe e i is assumed ha wage in la ion depends posi i ely
on he dis ance o he wage sha e om he wo ke s’ a ge o on he dis ance o he
wo ke s’ a ge p o i a e om he ealised p o i a e ^w − T
W
, while p ice in la ion
depends posi i ely on he de ia ion o he a e o p o i om he i ms’ a ge a e
^
p
T
F−
. Wi h his modi ica ion, Ma glin de i es an ‘equilib ium’o wage and
p ice in la ion ð^w¼^
pÞ, a which income dis ibu ion and accumula ion a e cons an
( ;g), while nei he i ms no wo ke s each hei a ge s, and i ms a e unable o ealise
hei in es men plans. In his model, a highe p opensi y o accumula e, and hus a
highe a ge p o i a e o i ms, leads o highe wage and p ice in la ion, a highe p o i
a e and a highe accumula ion a e. The ela ionship be ween economic ac i i y and
in la ion will hus be in line wi h he Phillips cu e. A highe a ge wage sha e o wo k-
e s leads o highe wage and p ice in la ion, a lowe p o i a e and a lowe accumula ion
a e, hence he opposi e o he Phillips cu e ela ionship be ween economic ac i i y and
in la ion. Fu he mo e, as Ma glin (1984) shows, he pa adox o h i is no longe gen-
e ally alid in his model and only holds when he accumula ion unc ion is e y p o i
a e elas ic.
In oducing hee ec so animpo edene gy p ice shock in Figu e 4, we can ollow
Ha cou ’s (2006: ch. 6) applica ion o he Ma glin (1984) model o pos -Wo ld Wa II
g ow h episodes in he de eloped capi alis economies. Acco ding o Ha cou (2006),
heoilp iceshocko heea ly/mid1970slead oaninc easeo hewo ke s‘ a ge wage
sha e in domes ic income in o de o p o ec hei eal wages, and hus o a lowe a ge
p o i a e o wo ke s. Fu he mo e, i ms’animal spi i s we e dampened, and, ex end-
ing he model owa ds open-economy ea u es, he expo su plus declined because o
208 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
ising impo p ices. This lowe ed agg ega e demand in he goods ma ke and hence he
i ms’ a ge p o i a e. In he case shown in Figu e 4, his gene a ed lowe accumula-
ion, a lowe p o i a e, a highe wage sha e and highe in la ion, hence s ag la ion, as in
he 1970s. Wi h a s onge nega i e e ec on agg ega e demand and hence on he i ms’
a ge p o i a e, o a weake nega i e e ec on he wo ke s’ a ge p o i a e, also a
combina ion o lowe accumula ion, lowe p o i a e, highe wage sha e and lowe in la-
ion would be possible, and hence a disin la iona y o de la iona y slowdown o
ecession.
The Ma glin (1984) model has been c i icised by Du (1987) and Nell (1985)
because i assumes pe manen no mal u ilisa ion o p oduc i e capaci ies, which ules
ou quan i y adjus men owa ds changes in demand. Inc eases in he wo ke s’ a ge
wage sha e a e always con ac iona y, and wage-led demand and g ow h egimes a e
hus impossible. Inc eases in ene gy p ices ha e no di ec e ec on he i ms’ a ge
p o i a e, and he indi ec e ec s ia excess demand a e nega i e, which means ha
ising ene gy p ices and ising p o i a es o p o i sha es, as ecen ly obse ed, a e
impossible. I should also be no iced ha wage and p ice in la ion equa ions do no
ake in o accoun in la ion expec a ions and hus do no allow o in la ion pe sis ence
h ough his channel.
= (1 − Ω)un
F
T
W
T
g
g
ΩΩ
ΩW
TΩF
T
p, w
p = w
– F
T
p
()
W
T
–
w
()
g, σ
g, σ
σ = sΠ
g(α, )
Figu e 3 Ma glin’s (1984) econcilia ion o eal wage esis ance and he p inciple o e ec i e
demand
In la ion is always and e e ywhe e …a con lic phenomenon 209
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
As a gued by Hein (2023a: ch. 5), i emains somewha unclea why in he Blecke –
Se e ield and La oie models wo ke s should aim a a highe wage sha e and hence aise
wage in la ion wi hou ully aking in o accoun expec ed p ice in la ion. I implies ha
hey sys ema ically unde es ima e u u e in la ion, i o he la e adap i e expec a ions
a e assumed. I pas in la ion in he wage in la ion equa ion is mean o ep esen wo ke s’
a emp a making up pas ailu es o each hei a ge eal wage a es o wage sha es, i
seems o be edundan , since his de e minan o cu en wage in la ion is al eady included
in he wage sha e o eal wage gap e m o he equa ion, as poin ed ou by Hein/Häusle
(2024). Gene ally, i is unclea how powe a ec s he di e en de e minan s in pa icula
in he wage in la ion equa ion o hese models in a cohe en way.
13
3.3 The Row ho n and Hein–S ockhamme app oach o modelling con lic
in la ion, dis ibu ion and employmen
An al e na i e app oach o modelling con lic in la ion, dis ibu ion and employmen in a
pos -Keynesian/Kaleckian amewo k can be based on Row ho n (1977). Simila app oaches
ha e la e been used by A es is/Sawye (2005), Hein (2006), Hein/S ockhamme (2010),
La oie (2006), Sawye (2002), and S ockhamme (2008), o example. The main ea u e
o his app oach, as compa ed o he i s a ian p esen ed abo e, is he ocus on adap i e
in la ion expec a ions o wo ke s in he wage in la ion equa ion. Inconsis en dis ibu ion
claims gene a e unexpec ed, o unan icipa ed, (dis-)in la ion and changes in dis ibu ion a
any a e o employmen . Only wi h consis en claims a e cons an in la ion and cons an dis-
ibu ion gene a ed. The e is hence always an in la ion ba ie , a ‘non-accele a ing in la ion
a e o unemploymen ’(NAIRU) o a ‘s able in la ion a e o employmen ’(SIRE). Howe e ,
al hough ‘… he e is a NAIRU a any poin in ime, …i is nei he exogenous no is i
a s ong a ac o o ac ual unemploymen ’, as poin ed ou by S ockhamme (2008:
500–501). The consis en claims equilib ium is hus endogenous o agg ega e demand and
o economic policies h ough a ious channels: endogenous aspi a ions, labou ma ke pe sis-
ence, capi al s ock, eal in e es a e, ax a e and eal exchange a e e ec s on a ge s (Hein/
S ockhamme 2010; Hein 2023: ch. 5).
Row ho n (1977) has laid he ounda ions o his app oach. Assuming ha dis i-
bu ion a ge s o wo ke s and i ms depend on unemploymen and capaci y u ilisa ion,
i.e. on su plus labou and su plus capaci y, he has a gued ha an aspi a ion gap, i.e.
inconsis en a ge s o wo ke s and i ms, gene a es unan icipa ed in la ion, and
hence accele a ing in la ion i he aspi a ion gap emains. Row ho n hus gene a es a
Philips cu e o unan icipa ed in la ion wi h he claims o he go e nmen , ne
axes, and he claims o he o eign sec o s, impo p ices, as shi ac o s.
14
Only i
in la ion is e y low, pas in la ion de e mining wo ke s’in la ion expec a ions may
no en e wage in la ion and a Phillips cu e o in la ion may a ise as in he Du ,
Blecke –Se e ield and La oie app oach. Fu he mo e, he pass- h ough o wage in la-
ion o p ice in la ion is incomple e, he e o e:
The wo king class can shi dis ibu ion in i s a ou by igh ing mo e igo ously o highe
wages, al hough he cos o such mili ancy is a as e a e o in la ion, as capi alis s y, wi h
only pa ial success o p o ec hemsel es by aising p ices. Likewise, capi alis s can shi
13. Fo a mo e de ailed discussion o he Blecke –Se e ield and La oie models and a compa ison
wi h he Hein–S ockhamme app oach, seen Hein/Häusle (2024).
14. Fo a ecen summa y o his app oach and a compa ison o o he cu en con lic in la ion
models, see Row ho n (2024).
216 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
dis ibu ion in hei a ou by pu suing a mo e agg essi e p o i s policy, bu wo ke s igh back,
so ha once again he a e o in la ion ises. The o me shi s dis ibu ion in a ou o wages and
he la e in a ou o p o i s. (Row ho n 1977: 224)
Closed economy ex book e sions o his app oach ha e been p esen ed by Hein/
S ockhamme (2009, 2011) in a g ow h model amewo k and Hein (2023: ch. 5.2.2)
in a sho - un le el amewo k. He e we ollow he la e . Wo ke s’and i ms’ a ge
wage sha es a e gi en as in equa ions (6) and (7) abo e, om which a consis en claims
a e o employmen , he SIRE (e
N
), can be de i ed:
eN¼1−h0−Ω0
Ω1(13)
Wi h e>eN, we ha e a posi i e aspi a ion gap, i.e. wo ke s’ a ge wage sha e exceeds he
i ms’ a ge , and wo ke s y o imp o e he wage sha e, o gi en labou p oduc i i y by
aising nominal wage in la ion abo e expec ed p ice in la ion. Fo he la e adap i e
expec a ions a e assumed, i.e. ^
pe
¼^
p −1.Wi he<eN,weha eanega i easpi a ion
gap, i.e. wo ke s’ a ge wage sha e alls sho o he i ms’ a ge , and wo ke s a e oo
weak o keep wage in la ion in line wi h expec ed p ice in la ion. We hus ge :
^w ¼ωðe −eNÞþ^
p −1;ω≥0:(14)
Fo he easons pu o wa d by Sylos Labini (1979), i ms’p ice in la ion in he agg ega e can
only pa ially pass- h ough he excess o wage (dis-)in la ion gi en by he (un-) a ou able
employmen a e:
15
^
p ¼ϑωðe −eNÞþ^
p −1;1≥ϑ≥0:(15)
Unexpec ed in la ion ð^
puÞin each pe iod is hus gi en by:
^
pu
¼^
p −^
p −1¼ϑωðe −eNÞ:(16)
The excess o wage in la ion o e expec ed p ice in la ion (wx) exceeds unexpec ed in la ion
in equa ion (16) because o he incomple e pass- h ough in he p ice in la ion equa ion (15):
wx¼^w −^
pe
¼^w −^
p −1¼ωðe −eNÞ:(17)
Because o ising wage in la ion wi h ising employmen a es and incomple e pass-
h ough o p ice in la ion, we also ob ain a p o i -squeeze dis ibu ion cu e:
Ω¼ΩeðÞ;∂Ω
∂e>0:(18)
Fo he closed economy model, we also ha e a wage-led demand egime, and wi h gi en
labou p oduc i i y, a wage-led employmen cu e, as explained abo e. Fu he mo e, in a
mone a y p oduc ion economy wi h c edi o –deb o ela ionships be ween en ie s
and i ms, eal deb e ec s o unexpec ed in la ion ha e expansiona y implica ions, i
15. He e he incomple e pass h ough only e e s o excess wage in la ion, assuming ha all i ms
a e able o ully pass- h ough he end a e o in la ion. Fo he implica ions o a ia ions o his and
u he ea u es o he model, see Hein/Häulse (2024).
In la ion is always and e e ywhe e …a con lic phenomenon 217
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
he ‘no mal case’(La oie 1995) o eal in e es a e e ec s on agg ega e demand and a
‘deb bu dened egime’p e ail (Hein 2014: ch. 9):
e¼eΩ;^
pu
ðÞ;∂e
∂Ω>0;∂e
∂^
pu>0:(19)
The ull model is shown in Figu e 6. In he uppe - igh quad an , we ha e he wo ke s’
and he i ms’ a ge wages sha es om equa ions (6) and (7), he p o i -squeeze dis ibu-
ion cu e om equa ion (18) and he wage-led employmen cu e om equa ion (19).
The uppe -le quad an and he lowe - igh quad an show he unexpec ed in la ion
cu e om equa ion (16) and excess wage in la ion om equa ion (17). The model
does no gene a e a s able Phillips cu e. Only a he SIRE ðeNÞwill wage and p ice in la-
ion be equal and cons an , unexpec ed p ice in la ion and excess wage in la ion will be
ze o, gene a ing cons an unc ional dis ibu ion, oo. Any employmen a e e≠eNwill
be associa ed wi h unexpec ed p ice (dis-)in la ion and excess wage (dis-)in la ion, and
hence wi h ising o alling wage sha es, which makes he p o i -squeeze dis ibu ion
cu e o a e owa ds he wo ke s’ a ge wage sha e cu e. The in e sec ion o p o i -
squeeze dis ibu ion and wage-led employmen cu e in e
1
hus does no gene a e a s able
equilib ium, because he dis ibu ion cu e will o a e coun e -clockwise, since excess
wage in la ion will exceed unexpec ed p ice in la ion, and he employmen cu e will
shi o he igh because o eal deb e ec s o unexpec ed in la ion. The employmen
Ω
pu(e)
e1
eN
eN
e
e
wx(e)
Ω(e1)Ω(e)
ΩW
T(e1)
ΩW
T(e)
ΩF
TΩF
T
e1
wx(e)
pu(e1)
pu,wx
pu, wx
pu(e)
e(Ω, pu)
wx(e1)
Figu e 6 Con lic ing claims, changes in dis ibu ion and unexpec ed in la ion in he Row-
ho n and Hein–S ockhamme amewo k
218 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
a e will ise beyond e
1
in his p ocess and hus mo e e en a he away om e
N
.The
SIRE/NAIRU is hus ‘no a s ong a ac o ’(Sawye 2002), and any de ia ion will
lead o a cumula i ely uns able p ocess, wi h ising employmen a es, ising unexpec ed
in la ion and ising excess wage in la ion, he la e exceeding he o me , and hence ising
wage sha es.
A s uc u al imp o emen o wo ke s’ba gaining powe , i.e. a ise in Ω
0
o Ω
1
in equa-
ion (6), will lead o an upwa ds shi / o a ion o he wo ke s’ a ge wage sha e cu e (6)
and o he p o i -squeeze dis ibu ion cu e (18). The wage-led employmen cu e (19)
will shi o he igh because o highe unexpec ed in la ion. In he lowe - igh quad an ,
he unexpec ed in la ion cu e (16) and he excess wage in la ion cu e (17) will shi up.
As a esul , we will ge a lowe SIRE, bu a highe employmen a e, highe unexpec ed
in la ion, highe excess wage in la ion and a highe wage sha e in he new empo a y
posi ion.
A highe a ge p o i sha e o i ms will shi hei a ge wage sha e cu e (7) and he
p o i -squeeze dis ibu ion cu e (18) down. The wage-led employmen cu e (19) will
shi o he igh because o highe unexpec ed in la ion. In he lowe - igh quad an ,
he unexpec ed in la ion cu e (16) and he excess wage in la ion cu e (17) will shi
up. As a esul , we will ge a lowe SIRE. The empo a y e ec s on he o he a iables
a e unde e mined. Wi h a weak eal deb e ec on he shi o he employmen cu e,
he employmen a e will all, and wi h a la employmen cu e, also unexpec ed in la ion
and excess wage in la ion may go down in he new empo a y posi ion. Howe e , hen he
o a ion o he dis ibu ion cu e and he shi o he employmen cu e will aise he
employmen a e and d i e up unexpec ed in la ion and excess wage in la ion again.
4 EFFECTS OF AN IMPORTED ENERGY PRICE INCREASE AND POLICY
IMPLICATIONS IN THE ROWTHORN AND HEIN–STOCKHAMMER
APPROACH
The e ec s o an inc ease in impo ed ene gy p ices can now be discussed in an open econ-
omy ex ension o he Row ho n and Hein–S ockhamme app oach.
16
We will p esen a
ou -s ep quali a i e g aphical analysis:
1. An inc ease in impo ed ene gy p ices and hence in he eal exchange a e hi s he
domes ic economy s a ing om a SIRE dis ibu ion equilib ium.
2. Fi ms ake ad an age o supply cons ain s and inc ease ma k-ups.
3. An in la ion- a ge ing cen al bank d i es long- e m eal in e es a e up.
4. A pos -Keynesian al e na i e policy app oach will be ou lined.
I should be no iced ha s eps 1–3 do no aim a exac ly eplica ing he obse a ions in he
cou se o he 2021–2023 in la ion spike, because we do no in eg a e iscal policy in e en ions
which ha e played a majo ole in s abilising he dis ibu ion o disposable income, agg ega e
16. The model used he e ollows Hein (2023: ch. 5.7) wi h one excep ion. While in Hein (2023:
ch. 5.7) i is assumed ha changes in he eal exchange a e only a ec i ms’ a ge wage sha e wi h
some lags and i ms’only pass h ough pe sis en changes in p ices o impo ed aw ma e ials and
semi- inished p oduc s, we now assume ha his pass- h ough is immedia e. Fo pos -Keynesian
open economy models o con lic in la ion in he Du , Blecke –Se e ield and La oie adi ion,
see Bas ian/Se e ield (2020), Blecke (2011), La oie (2022: ch. 8), Sasaki e al. (2013), and
Ve a (2014), o example. Fo a simila app oach om a Classical–Keynesian o neo-Rica dian
mone a y pe spec i e, see Mo lin (2023).
In la ion is always and e e ywhe e …a con lic phenomenon 219
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
demand and employmen . We a e hus only poin ing ou he pu e e ec s o hese h ee s epsin
he con ex o ou model. Fo ou analysis, we assume ha wo ke s only buy om domes ic
i ms, such ha hei dis ibu ion a ge does no change,
17
and we can hus keep equa ion
(6) o he wo ke s’ a ge wage sha e, equa ion (14) o wage in la ion and equa ion (17)
o excess wage in la ion. F om equa ion (5) o he p o i sha e in he open economy, i ol-
lows ha he i ms’ a ge p o i /wage sha e is now de e mined by hei a ge ma k-up and
he a io zo uni ma e ial o uni wage cos s om equa ion (4). Fo a cons an echnology,
i.e. cons an labou p oduc i i y ðyÞand a cons an aw ma e ial/semi- inished p oduc -
ou pu a io (μ), his a io is a ec ed by o eign in la ion ela i e o domes ic wage and
p ice in la ion, and by he nominal exchange a e. The e o e, we can ake he i ms’ a ge
p o i sha e and hei a ge wage sha e o be co-de e mined by he eal exchange a e, as
in he open economy con lic in la ion models by Bas ian/Se e ield (2020), Blecke
(2011), and La oie (2022: ch. 8.):
ΩT
F¼1−hT
F¼1−h0−h1a ;h0;h1>0:(20)
An inc ease in impo ed ene gy p ices (o in la ion), ela i e o domes ic nominal wages
and p ices (o in la ion), hus aises he eal exchange a e and lowe s he i ms’ a ge
wage sha e.
18
The e o e, o he open economy, we ge he ollowing consis en claims
a e o employmen , he SIRE, om equa ions (6) and (20):
eN¼1−h0−h1a −Ω0
Ω1(21)
Fo p ice in la ion, we can now e en assume comple e pass- h ough o o al wage in la ion
wi hou changing he quali a i e esul s. Based on he p icing equa ion (3), wi h a con-
s an ma k-up (m) and cons an echnology ðy;μÞ, we ge o p ice in la ion:
^
p ¼ξ1
^w þξ2ð^
p þ^
a Þ¼ξ1ωe −eN
þ^
p −1
þξ2ð^
p þ^
a Þ;(22)
wi h ξ1¼ð1þmÞw=y
p,ξ2¼ð1þmÞp aμ
p, and hence ξ1þξ2¼1. E en i ully passed h ough,
wage in la ion will exceed p ice in la ion, i o eign in la ion plus he g ow h a e o he nom-
inal exchange a e all sho o domes ic wage in la ion. Unexpec ed in la ion is gi en by:
^
pu
¼^
p −^
p −1¼ξ1ωðe −eNÞþξ2ð^
p þ^
a −^
p −1Þ:(23)
I he expec ed eal exchange a e is cons an and hence ae
¼^
p þ^
a −^
p −1¼0, unexpec ed
p ice in la ion will all sho o excess wage in la ion, and we also ge he p o i -squeeze dis-
ibu ion cu e om equa ion (18). Fu he mo e, a any employmen a e he dis ibu ion
17. This is di e en om he models by Bas ian/Se e ield (2020) and La oie (2022: ch. 8),
whe e he eal exchange a e also en e s he wo ke s’ a ge wage sha e, and om Blecke (2011),
whe e i is no included in o he wo ke s’ a ge , bu in o he wage in la ion equa ion, he incon-
sis ency o which has been c i icised by Bas ian/Se e ield (2020).
18. While in ou sho - un model he nominal exchange a e is exogenous and he eal exchange
a e is ully endogenous o he in la ion di e en ial be ween he domes ic and he o eign economies,
Bas ian/Se e ield (2020), Blecke (2011), La oie (2022: ch. 8.) and Ve a (2014), o example, ha e
linked his wi h eal exchange a e a ge ing by nominal exchange a e policies. Howe e , i emains
somewha unclea wha exac ly hese policies a e supposed o be. See Hein (2023: ch. 6) o a
discussion.
220 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
cu e will o a e owa ds he wo ke s’ a ge wage sha e, as in he closed economy model p e-
sen ed in he p e ious sec ion.
Fo he eason poin ed ou abo e, we assume a wage-led domes ic demand egime, and
wi h cons an labou p oduc i i y, employmen is assumed o be wage-led, oo. Unex-
pec ed in la ion has a posi i e e ec on he employmen a e because o eal deb e ec s.
Fu he mo e, he eal exchange has posi i e e ec s on agg ega e demand and employmen ,
i he Ma shall–Le ne condi ion holds and ne expo s a e posi i ely a ec ed by a ise in
he eal exchange a e, i.e. by a eal dep ecia ion o he domes ic cu ency:
e¼eðΩ;^
pu;a Þ;∂e
∂Ω>0;∂e
∂^
pu>0;∂e
∂a
>0:(24)
To illus a e he e ec s o an inc ease in impo ed ene gy p ice and o eign in la ion and
hence in he eal exchange a e in Figu e 7.1, we s a wi h an equilib ium a he SIRE
Ω
e
e
e1(Ω)e2(Ω)
(e)ΩW
T
ΩF1
T
ΩF2
T
(e)Ω1
(e)Ω2
e2e2e1 = e1
NN
e2
e2
Ne1 = e1
N
Ω1
Ω2
pu
p2
u
p1 = 0
u
p1(e)
u
p2(e)
u
No e: The inc ease in ene gy p ices igge s shi s owa ds he dash-do ed lines.
Figu e 7.1 An inc ease in impo ed ene gy p ices in he Row ho n and Hein–S ockhamme
amewo k
In la ion is always and e e ywhe e …a con lic phenomenon 221
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
a e1¼eN
1;Ω1¼ΩT
W¼ΩT
F;^
pu
1¼0. The inc ease in he eal exchange a e shi s he
i ms’ a ge wage sha e cu e in he uppe quad an down om ΩT
F1 o ΩT
F2,and he
p o i -squeeze dis ibu ion cu e mo es down om Ω1ðeÞ o Ω2ðeÞ. The eal de alua ion
may shi he wage-led employmen cu e sligh ly o he igh om e1ðΩÞ o e2ðΩÞ. The
unexpec ed in la ion cu e in he lowe quad an shi s up om ^
pu
1ðeÞ o ^
pu
2ðeÞ. We will
hus ge a new empo a y posi ion a e2>eN
2;ΩT
W>Ω2>ΩT
F2;^
pu
2>0, wi h a lowe SIRE
and a lowe employmen a e exceeding he new SIRE. The wage sha e will be lowe , asso-
cia ed wi h ising in la ion a es (posi i e unexpec ed in la ion), as obse ed in he s udies
e e ed o in he in oduc ion, wi hou i ms ha ing aised ma k-ups ye . In e es ingly,
his uns able posi ion con ains some o ces which mo e he economy owa ds he ini ial
equilib ium: unexpec ed in la ion lowe s he eal exchange a e, aises he i ms’ a ge
wage sha e, aises he SIRE and shi s he unexpec ed in la ion cu e down. The p o i -
squeeze dis ibu ion cu e is also shi ed up, and i will o a e owa ds he wo ke s’ a ge
wage sha e cu e. The e ec o unexpec ed in la ion on he employmen cu e is ambig-
uous: a alling eal exchange a e shi s he cu e o he le ; eal deb e ec s o unexpec ed
in la ion shi i o he igh . Taken oge he , posi i e e ec s on he employmen a e may
eme ge as well. The inal esul s will depend on he speci ica ion o he ela i e s eng hs
and speeds o hese adjus men p ocesses.
Howe e , hese coun e -s ag la ion o ces do no become e ec i e i i ms ake he
oppo uni y o bo lenecks and supply chain p oblems and inc ease he ma k-up, as high-
ligh ed in he empi ical s udies e e ed o in he In oduc ion. The e ec s a e shown in
Figu e 7.2. An inc ease in he a ge ma k-up shi s he i ms’ a ge wage sha e cu e
u he down o ΩT
F3, and he p o i -squeeze dis ibu ion cu e mo es down o Ω3ðeÞ.
Rising domes ic in la ion and he loss o in e na ional p ice compe i i eness shi s he
wage-led employmen cu e o he le o e3ðΩÞ. The unexpec ed in la ion cu e shi s
up u he o ^
pu
3ðeÞ. The economy hus mo es o a new empo a y posi ion a
e3>eN
3;ΩT
W>Ω3>ΩT
F3;^
pu
3>0, wi h a lowe SIRE and a lowe employmen a e exceed-
ing he new SIRE, a lowe wage sha e, and highe unexpec ed in la ion, each compa ed o
he p e ious posi ion.
Again, he e a e he endogenous coun e -s ag la ion ends ou lined abo e, which,
howe e , do no become e ec i e i he cen al bank applies in la ion- a ge ing policies
and d i es up long- e m eal in e es a es by means o aising sho - e m a es in he
money ma ke in o de o igh ising in la ion,asweha eseensince2022.Since
highe eal in e es a es mean highe cos s o he i ms, based on he p icing equa ion
(3), his will aise hei a ge ma k-up and he a ge p o i sha e,and hein e es cos
channel o in la ion will become e ec i e (Cucciniello e al. 2022; Hein 2006; Hein/
Schode 2011; Le e o 2023; Lima/Se e ield 2010). The i ms’ a ge wage sha e now
u ns o:
ΩT
F¼1−hT
F¼1−h0−h1a −h2i ;1>h0>0;h1;h2>0:(25)
The e o e, we ge he new consis en claims a e o employmen , he SIRE, including
long- e m eal in e es a e e ec s, om equa ions (6) and (25):
eN¼1−h0−h1a −h2i −Ω0
Ω1(26)
As shown in Figu e 7.3, an inc ease in he eal in e es a e hus shi s he i ms’ a ge
wage sha e cu e u he down o ΩT
F4, and he p o i -squeeze dis ibu ion cu e mo es
222 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
down o Ω4ðeÞ. Wi h ‘no mal case’(La oie 1995; Hein/Schode 2011) e ec s o ising
eal in e es a es on agg ega e demand, he wage-led employmen cu e u ns o:
e¼eΩ;a ;i
ðÞ;∂e
∂Ω>0;∂e
∂a
>0;∂e
∂i
<0:(27)
An inc ease in he eal a e o in e es hus shi s his cu e o he le o e4ðΩÞ.The
unexpec ed in la ion cu e shi s up u he o ^
pu
4ðeÞ. The economy may now mo e
owa ds a new empo a y posi ion a e4>eN
4;ΩT
W>Ω4>ΩT
F4;^
pu
4>0, o example,
e1(Ω)e3(Ω)
e2(Ω)
(e)
ΩW
T
ΩF1
T
ΩF2
T
ΩF3
T
(e)Ω1
(e)Ω2
(e)Ω3
e
(e)
pu
3
(e)
pu
2
(e)
pu
1
Ω
Ω1
Ω2
Ω3
pu
pu
3
pu
2
p
u
1= 0
e3
Ne2
Ne1 = e1
N
e3e2
e
e3
Ne2
Ne1 = e1
N
e3e2
No e: The inc ease in ma k-ups igge s shi s owa ds he dashed lines.
Figu e 7.2 Fi ms ake ad an age o supply cons ain s and aise he ma k-up in he Row-
ho n and Hein–S ockhamme amewo k
In la ion is always and e e ywhe e …a con lic phenomenon 223
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
wi h a lowe SIRE and a lowe employmen a e exceeding he new SIRE, a lowe wage
sha e, bu now also lowe unexpec ed in la ion, each compa ed o he p e ious posi-
ion. Cen al banks’in la ion- a ge ing in e es a e policies can hus b ing unexpec ed
in la ion down, bu a he expense o an e en lowe employmen a e and a lowe SIRE,
and hence gene a ing in la iona y p essu e h ough he in e es cos channel. Wi h
u he in e es a e hikes, unexpec ed in la ion may all o ze o o may become nega-
i e, bu only i he e ec on he employmen a e is s onge han he e ec on he
SIRE. Di e en scena ios a e possible, as discussed in Hein (2006), Hein/S ockham-
me (2010) o in Lima/Se e ield (2014) o closed economy models. I cen al
e
ΩF1
T
ΩF3
T
ΩF4
T
e4(Ω)
e1(Ω)e3(Ω)
(e)ΩW
T
(e)Ω1
(e)Ω3
(e)Ω4
(e)
p3
e4
Ne3
Ne1 = e1
N
e4e3
u
(e)
p4
u
Ω
Ω1
Ω4
Ω3
pu
p3
u
p4
u
p
1 = 0
u
e
e4e3
e4e3
Ne1 = e1
N
N
(e)
p1
u
No e: The inc ease in long- e m eal in e es a es igge s shi s owa ds he dash-do ed lines.
Figu e 7.3 An inc ease in he long- e m ealin e es a e in he Row ho n and Hein–S ockhamme
amewo k
224 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 2
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
banks ollow such an in la ion- a ge ing s a egy, he endogenous coun e -s ag la ion
imp o emen s poin ed ou abo e a e again unde mined, o cou se.
An al e na i e policy app oach o dealing wi h an impo ed ene gy in la ion shock
can be based on he pos -Keynesian mac oeconomic policy mix, as p oposed by A es is
(2013), Hein (2023: ch. 6) and Hein/S ockhamme (2010, 2011). Acco ding o his
app oach, cen al banks should e ain om mac oeconomic ine- uning, a ge con-
s an ly low long- e m eal in e es a es and ake ca e o asse p ice in la ion and inan-
cial s abili y by o he ins umen s han in e es a e policies. Wage and incomes
policies should be in cha ge o s able in la ion a he a ge a e and con ibu e o s a-
bilising income dis ibu ion. Fiscal policies should s abilise agg ega e demand and
employmen a a maximum non-in la iona y le el and should educe inequali y in
he dis ibu ion o disposable income. These policies should be coo dina ed and
should join ly aim a s abilising eal exchange a es and oughly balanced cu en
accoun s in he medium un.
Applying such an app oach in he ace o ising impo ed ene gy p ices would mean o
aim a sha ing he bu den o a highe eal exchange a e, and s abilising domes ic dis ibu-
ion, in la ion and agg ega e demand, pa o which has happened in se e al coun ies.
Since ising impo ed ene gy p ices in eal e ms mean less domes ic income in eal
e ms, e en wi h a cons an wage sha e (and wi h low o ze o p oduc i i y g ow h) eal
wages and eal p o i s may all. Those who a e mos a ec ed would hus ha e o be assis ed
by iscal policies.
As shown in Figu e 7.4, such a bu den sha ing would imply i ms’ a ge wage sha e o
e u n o he ini ial equilib ium le el ΩT
F1¼ΩT
F5bylowe ing heagg ega ema k-up
acco ding o he ise in he z- a io, which means o shi only he inc ease in ene gy
cos s o p ices, bu no ma king up hese ex a cos s. Cen al bank policies a ge ing
low long- e m eal in e es a es, compe i ion policies, axing ex a p o i s, educing bo le-
necks ia public in es men , e c. could con ibu e o lowe ing he i ms’a e age ma k-up
on uni a iable cos s and aising hei a ge wage sha e.
Sha ing he bu den would also mean o align he wo ke s’ a ge wage sha e wi h he
easible wage sha e gi en by i ms’p icing, such ha we ge ΩT
F5¼ΩT
W5¼Ω5,so ha
he SIRE u ns o a co ido and unexpec ed in la ion pˆ
5uðeÞ u ns o ze o be ween eN
5L
and eN
5U. In his co ido , wage-ba gaining coo dina ion p e en s ins abili y gene a ed by
unexpec ed in la ion and edis ibu ion in a ou o deb o s, and also s abilises unc-
ional income dis ibu ion. E ec i e wage-ba gaining coo dina ion equi es s ong
ade unions and employe associa ions, and also go e nmen in ol emen (minimum
wage policies, ex ension clauses, e c.). E en i hese ins i u ional condi ions a e gi en,
i is di icul o concei e ha wage-ba gaining coo dina ion will be e ec i e wi h e y
low and e y high employmen a es. Wi hin he co ido , howe e , i would be possible
o ollow an in la ion and dis ibu ion s abilising wage no m, acco ding o which, in he
medium e m, nominal wage a e g ow h should be equal o he a ge a e o in la ion
plus end p oduc i i y g ow h o he economy as a whole. The a ge a e o in la ion
shouldbe oughlyinlinewi h hein la ion a eo main adingpa ne s, ocon ibu e
o cons an nominal and eal exchange a es and balanced cu en accoun s and o p e-
en begga - hy-neighbou policies. In e na ional coo dina ion is hus impo an .
Finally, iscal policies’demand managemen , ollowing a unc ional inance app oach,
can hen shi he wage-led employmen cu e e5ðΩÞ o he maximum employmen
a e consis en wi h he a ge a e o in la ion. Tax and social policies should educe
inequali y and suppo lowe income households in ca ying he bu den o highe eal
ene gy p ices.
In la ion is always and e e ywhe e …a con lic phenomenon 225
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
