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Step 2 is:

* Austerity slashes public sector worker pay and pushes public sector workers into unemployment.

* Since public sector and private sector workers compete in the same job market, reducing the wages of one reduces the wages of the other through increased competition.

* Since the public sector is the largest single customer of the private sector, reducing its spending reduces the income of the private sector. This leads to lay offs and retrenchments in pay as well.

* Increasing unemployment also puts downward pressure on wages. The more desperate people are to have a job, the lower the wages they will accept.

* More downward pressure is put on wages by slashing social security, too (usually austerian target #1). The more unpleasant you make unemployment, the more desperate people will be to take a job. The more desperate people are to take a job, the lower the wages they accept will be.




This is a purely classical (pre-keynesian) story - demand goes down in many individual markets, and the market adjusts by reducing prices and quantity supplied. It has no output gap, no involuntary unemployment (read: wages at a price $P, but people willing to work at $P and unable to find a job), etc.

You've just shown that classical economics explains the Greek situation perfectly, contradicting Varoufakis.


No, neoclassical economics would have us believe that wages would go down until a clearing price was hit and everybody was employed.

This is, indeed, exactly the type of mind numbing idiocy that Varoufakis was talking about.


That's exactly what happens in your story. Wages go down from $P to $P2. Fewer people are willing to work at $P2 than at $P, so employment goes down. That's a standard market clearing story.

The classical claim is that don't have involuntary unemployment - prevailing wage levels equal to $P (in some segment) and simultaneously people unable to find work at $P.

Your story agrees with this.




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