The general implication of this is that inﬂationary problems arise when demand runs ahead of capacity, even when there is unemployment of labour, for there may simply be inadequate capacity to support the full employment of labour (or the capacity may be distributed across regions in a way which does not match the distribution of potential workers). When enterprises operate with high levels of capacity, they are faced with rising unit costs: prices rise relative to wages in these circumstances, and hence real wages fall, but money wages cannot catch up with prices to restore the initial real wage. Consequently, in this approach, inﬂation rises when the level and composition of demand increase past the point where production can increase at around constant costs, and into the range where unit costs are rising (and bottlenecks appearing). Measures such as ‘reform of the labour market’, are then irrelevant for the level of unemployment and of inﬂation. It is rather the level, composition and distribution of the capital stock which is relevant for unemployment and inﬂation. The second, and related, set of inﬂationary pressures comes from the inherent conﬂict over the distribution of income. The ability of the economy to reconcile the conﬂict depends, inter alia, on the productive capacity of the economy (the ‘size of the cake’). The determination of the level of economic activity which corresponds to constant inﬂation, what we term the ‘inﬂation barrier’ (also in the literature on the...
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