Ludwig von Mises, Wages, Unemployment and Inflation

Ludwig von Mises’s “Wages, Unemployment and Inflation,” originally published in Christian Economics in 1958 and republished in the supplied 1962 edition, is a polemical economic article organized into eleven short sections. It links a theory of wage determination to an explanation of unemployment, inflation, and depression, then turns to the political pressures sustaining monetary expansion. Its central thesis is that capital accumulation raises sustainable real wages, whereas coercively imposed wage increases produce unemployment unless governments temporarily accommodate them through inflation.

Mises begins with consumer sovereignty: businesses must recover their production costs through sales at prices buyers accept. Employers therefore cannot indefinitely pay workers more than the value consumers attribute to their contribution. This makes the employer an intermediary rather than the ultimate source of wages:

It is upon the consumers that the incidence of the wage payments falls.

Because wage earners themselves purchase most consumer goods, Mises treats them as participants in determining the remuneration of other workers. This move challenges an account of wages centered exclusively on conflict between employers and employees. For him, wage claims encounter a constraint imposed by consumers’ valuations, not simply resistance from owners.

The second section identifies capital investment as the means of relaxing that constraint. Buyers pay for products, not for effort or hours expended; better equipment increases output per hour and thereby permits higher remuneration. Mises explains international wage differences through differences in capital available per worker, contrasting American accumulation with policies he regards as obstructing investment in India. His conclusion is categorical:

There is only one way that leads to an improvement of the standard of living for the wage-earning masses, viz., the increase in the amount of capital invested.

The argument distinguishes technological possibilities from the accumulated resources needed to realize them. Scientific knowledge alone does not equip workers with productive machinery. Mises accordingly credits saving and investment, rather than union organization or legislation, with improvements commonly attributed to labor reform.

The third section supplies the article’s account of unemployment. Mises argues that an unhampered labor market tends toward full employment at wages corresponding to labor’s marginal productivity. Union coercion or statutory intervention can raise wages above that level, but cannot ensure employment for everyone seeking work. His objection concerns wage increases above the market-clearing rate, not rising wages as such. Nevertheless, his confidence in market adjustment and his characterization of union power carry the argument; the article offers no empirical comparison testing those premises.

Sections four through six explain how credit expansion temporarily conceals this conflict. Additional money and bank credit do not create capital goods. Instead, cheaper borrowing encourages projects that appear feasible only because monetary expansion makes resources seem more abundant. Demand for labor and materials increases, generating an artificial boom. Previously excessive money wages become compatible with employment because rising prices reduce their real purchasing power:

Inflation can cure unemployment only by curtailing the wage earner's real wages.

When unions demand compensation for higher living costs, the original problem returns, requiring further expansion to prevent unemployment. For Mises, this is a recurrent sequence of wage pressure, monetary accommodation, price increases, and renewed wage demands. Ending inflation exposes investments undertaken under misleading credit conditions. Depression is therefore interpreted as the painful correction of earlier errors, rather than as damage independently generated by monetary stabilization.

Sections seven and eight distinguish this account from both purchasing-power remedies and wage-push explanations of inflation. Mises rejects the proposition that higher wages, unemployment benefits, and public works can restore prosperity simply by increasing spending. When financed through monetary expansion, increased expenditure raises prices and provides only temporary relief. Yet he explicitly refuses to identify wage increases themselves with inflation:

What the unions can generate by forcing the employers to accept wage rates higher than the potential market rates is not inflation and not higher commodity prices, but unemployment of a part of the people anxious to get a job.

This distinction allocates separate roles to unions and government. Unions impose wage rates that Mises considers unsustainable; government creates inflation to prevent the resulting unemployment from becoming politically intolerable. Inflation means an expansion of money and checkable credit, while rising living costs are its consequence.

The final three sections develop the political and distributive implications. Governments face pressure to accommodate wage demands while fearing unemployment and electoral defeat. Parties profess opposition to inflation but support easy credit, greater expenditure, and tax reductions. Mises acknowledges that organized labor is not the only pressure group threatening monetary stability, though he assigns it primary responsibility. His discussion is openly adversarial, depicting public sympathy for union demands as resting on mistaken economic beliefs.

The conclusion returns to workers’ interests, now understood beyond their immediate pay packets:

Millions of wage earners own saving deposits, bonds and insurance policies.

Workers are also savers and holders of monetary claims; inflation can erode their accumulated security even when nominal earnings increase. Mises thus challenges the assumption that sound money serves owners at workers’ expense. The article’s enduring conceptual focus is the distinction between monetary income and real resources: durable improvement requires productive capital, while monetary accommodation can disguise, but cannot permanently overcome, the constraints governing wages and employment.