What can happen if wages rise sharply?

Some candidates in France’s April 2022 presidential election have proposed a very sharp increase in low wages . G iven the structure of wages in France, this would lead to a sharp increase in wages virtually across the board. This leads us to examine the possible effects of a sharp increase in wages. 1. If prices rise sharply in parallel, real wages will not change and there will merely be a deterioration in price competitiveness relative to other countries . W ith the euro, this can no longer be offset by a depreciation of the exchange rate. 2. If prices do not change (for example due to foreign competition), a distinction must be made between the short- run equilibrium (Keynesian) and the long- run equilibrium (full employment). In the short run , consumption, employment and production will increase, combined with a small fall in earnings although not necessarily in investment. In the long run , consumption will increase, while earnings and investment will fall sharply. If investment does not increase in the short run , there will be no increase in potential growth in the long run . 3. It is possible that prices cannot move in the sector that is exposed to foreign competition (industry, services exposed to competition) and that they rise in the sector that is sheltered from foreign competition. The result would then be “Dutch disease”: profitability would fall in the sectors exposed to foreign competition and not in others, so capital would flow to the sectors sheltered from competition. 4. For an open economy in a currency area, a sharp increase in wages can only be positive if: It does not drive up prices, even in the sector sheltered from competition (otherwise there is Dutch disease); The increase in consumption in the short run leads to an increase in investment, which increases potential production in the long run , despite the fall in earnings. It is unlikely that these two conditions will be met. A third possibility remains: That the increase in wages leads to an increase in the labour supply that increases potential production in the long run .