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I am reading a book called "Austerity, the history of a dangerous idea" written by Mark Blyth. While talking about Keynes, the author writes:

"he [Keynes] showed that although any worker can accept a wage cut to price himself into employment, if all workers did this, it would in the aggregate lower consumption and prices, and thus increase real wage (the wage-minus-price effect), leaving the worker who "adjusted" poorer and just as unemployed"

I don't understand real wage/price effect. If prices drop with wages, how is the employee becoming poorer? If I make less but it costs less, shouldn't I be able to buy the same amount?

Thank you for your input!

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    $\begingroup$ I changed the title, this is not about what Keynes said, rather Blyth’s explanation. $\endgroup$ – Brian Romanchuk Apr 23 at 10:56
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Without context, it is unclear what Blyth meant. However, the usual argument runs as follows. The worker starts out with a certain nominal wage, and nominal debts. If wages and prices fall by some percentage, for current spending, the two changes cancel out - goods will cost the same percentage of weekly wages as before. However, the drop in prices does not reduce debt payments, and so those are larger relative to wages.

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  • $\begingroup$ Thank you for your help! Essentially, people get debts with their current incomes, as people accept lower wages in aggregate, they still still have to pay former debts (like a house or car), which can be substantial. I assume the same is true for student debts: people accrue large amounts of loans thinking thinking they'll get a decent-paying job, just to end up competing for lower wages and free internships due to a large demand for jobs. $\endgroup$ – Johnathan Apr 24 at 20:33

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