The Financial Times has a story with a headline that caught my attention:

The eurozone’s strange low-wage employment boom

Alexandru is one of the luckier ones. A 24-year-old who emigrated to Italy from Romania at the age of 12, he has recently secured a job with a permanent contract as a printer at a typographer in a small town near Milan.

“It’s a good place,” he says of his new employer. “Now if I’m sick, they pay me. I have holidays, I have insurance. In the firm I worked for before, I didn’t have anything.”

Good news, but economists are puzzled:

The recovery in the eurozone’s labour market has taken economists by surprise. Businesses are creating jobs at a pace that few had foreseen. But while there is little doubt that the region is getting back to work, there are big question marks about the quality of the jobs being created.

Wage growth remains poor, even in stronger economies such as Germany.

I suspect that two things confuse many economists:

1. In some older Keynesian models, higher wages lead to higher aggregate demand. Keynes himself criticized wage cutting as a cure for depression, claiming it would only serve to further depress aggregate demand. (Keynes is not popular in Germany, which ignored his advice and achieved dramatically lower unemployment rates.)

2. In modern Keynesian (Phillips curve) models, tighter labor markets are associated with rising wages. Admittedly that might not be expected in southern Europe, where economies are still weak despite recent job gains, but Germany has very low unemployment.

Here’s what is actually going on:

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When you start thinking about “never reason from a price change“, it’s hard to think of anything else.

PS. When I first read that FT headline, I was reminded of the old New York Times headline, which said something to the effect: “Prison populations keep expanding, despite fall in crime rate”.

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