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Economics/Wholesale prices and real wage unemployment

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Question
Dear Pallas21,

I would be extremely grateful if you would help me with this paragraph.

"Wholesale prices fell by 25 per cent between 1921 and 1929. However, falling prices were not matched by falling wages, as understandably, the increasingly unionised labour movements resisted nominal wage cuts. This led to real wage unemployment."

I understand what real wage unemployment is, but I don't see how wholesale prices falling is a problem. Surely that would make retail products cheaper? And then workers could buy more with their increased wages, and money would flow back into the economy. Or is it that because retail products are cheaper, businesses don't make as much money as they would if their products were more expensive but surely this is offset by the fact that wholesale prices are cheaper?

Have I just completely misunderstood this concept? As you can no doubt tell from the manner of this question, I'm not an economy student. I'm writing an alternative history novel, and it requires me to understand some basic economic concepts, but as my knowledge of the economy is EXTREMELY limited, I'm finding it very difficult. With this in mind, I would be very grateful if you could explain this wholesale prices issue to me as simply as you can.

Also, I know that you answer questions related to "applied economics", but my knowledge of the economy is so small that I'm not sure if this question falls under the heading of "applied economics" or not. I'm very sorry if this question isn't in your area, but you seemed like the most approachable and appropriate expert.

Thank you very much.

Answer
Thank you for your query. I don't recall the wholesale prices trend in those years, would have to check for the historic data on prices and wages. However, from the top of my head, I can venture that even when wholesale prices fell, the mechanisms of transmission did not result in lower wages due to the inelasticity of the wages in response to the Unions. Unionized labor would always resist an adjustment in wages that would be lower wages or benefits.  This will generate an adjustment on the number of workers or hours worked, thus, unemployment.  If the wholesale price of a good goes down, all things equal, wages being the adjustment variable, if you cannot pay less, you will employ fewer people.  Hope this helps.  All boils down to supply and demand and the inefficiencies introduced to their adjustment by something like Unions, e.g. wages wouldn't go down. and wage is the price of labor. Good luck.

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Pallas21

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I will be happy to answer questions related to applied economics. i.e. economics applied to small businesses and on our day to day existence.

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over 25 years of experience in economics, both as an academic and in the field.

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Masters in Economics, Masters in Public Administration

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