Myth #2: Wages rising faster than productivity means cost-pushing inflation is occuring
Does Figure 12-6 prove that cost-push pressures are causing inflation? Most people would say “yes,’ but in fact it does not. It shows that wages are rising quickly enough to generate inflation, but it does not tell us why wages are rising that rapidly. Perhaps a strong labor union is pushing up wage rates, making this indeed a case of cost-push inflation. Or, perhaps the graph shows non-union wages (such as computer programmers) being pulled up by heavy demand for their skills in the face of a shortage of computer programmers.
Myth #3: All wage and price increases have negative economic effects because they generate inflation
This is a commonly held belief, but is not always true. In a market economy, wages and prices are constantly changing in response to changes in supply and demand. For example, in myth #2 above, if businesses need more computer programmers than are currently available, the resultant wage increase will serve a positive purpose: it will increase the supply of programmers by encouraging more people to become programmers. Similarly, if consumers want to buy more steak than is presently on the market, the price of steak will rise, encouraging producers to increase the supply of steak. Thus, changes in prices (including price increases) also play an important role in making the economic system operate effectively, by adjusting supply to demand. If prices could not change, the economic system would be unable to adjust to changes in demand.
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