Does inflation increase wealth? That’s what some economists and business journalists claim, who should know better. Inflation has a silver lining to economic well-being, they claim, or price increases are good for the economy as a whole.
The argument in a nutshell is that inflation is bringing newly impoverished retirees back into the workforce. Your work increases gross domestic product, and we will all benefit from the goods and services it creates. The same goes for those who put off retirement because inflation can’t afford it.
It’s true that inflation is making people on fixed incomes poorer, and some people are responding by going back to work. But does that really help the economy?
no It boosts GDP and its growth prospects, but brings little macroeconomic benefit. Economics 101 teaches that there is something of a dichotomy between work and leisure. Why don’t people try to work all the time? Because they value the free time they would give up more than the additional money they could earn. Most people are reasonably happy with 40-hour weeks and a month or so vacation a year. But GDP would be higher if they worked 80 hours a week and took no vacations at all. The prospects for economic growth would also increase.
Would the average person be happier and would it help the economy if people were forced to work so much more just to boost GDP? Of course not. Most people would be unhappy with an 80-hour workweek, and economic conditions would be worse, not better.
The same considerations apply to the decision to retire. Many people look forward to retirement and consider the free time they gain to be of greater value than the extra wages they could earn by staying in the job. But then comes inflation. They feel – and indeed are – poorer than before. So you return to the job market.
The returning workers may have more money, but the free time they had to forego was of even greater value, according to their own revealed preference. This decision is only good for the economy if we define “the economy” simply as maximizing GDP.
Mr. Block is an economics professor at Loyola University New Orleans.
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Appeared in the April 21, 2022 print edition as “There’s More to Wealth Than Working”.
https://www.wsj.com/articles/wealth-work-retirement-inflation-fixed-income-rejoin-workforce-retiree-productivity-leisure-poverty-11650485908 Getting retirees back into the workforce is not ‘good for the economy’