The Daily Journal – The debate over restoring purchasing power in Venezuela often becomes trapped in a recurring dogma: the premise that any wage increase inevitably leads to an inflationary spiral or the collapse of the productive apparatus.
Neoclassical orthodoxy argues that the State or the private sector does not “have the money” to pay decent wages. However, a rigorous analysis free from ideological blinders demonstrates otherwise: at the macroeconomic level, it is the market that pays for wage increases.
To understand this dynamic, we must move beyond the individual microeconomic perspective — where wages are viewed solely as a production cost — and adopt a structuralist and post-Keynesian approach. At the macroeconomic level, workers’ compensation is not a bottomless pit but rather the fundamental component of effective demand.
The effective demand circuit
Wage earners have a Marginal Propensity to Consume (MPC) close to one. In other words, virtually all income received by the working class flows immediately into the domestic market to purchase essential goods and services. When the population’s real wages rise, liquidity flows directly into the base of the economic pyramid.
Who, then, finances this increase? The companies themselves, through faster sales. The monetary flow that leaves through payroll returns to the cash registers of businesses and industries. The market “pays” the wage because expanded consumption among the majority validates the private sector’s scale of production.
Idle capacity and wage-led growth
The argument that monetary increases automatically generate inflation rests on the false assumption that the economy operates at 100% of its installed capacity. In a context of deep contraction or stagnation, the Venezuelan economy has a high percentage of idle capacity.
As aggregate demand (C + I + G + NX) increases, companies do not need to raise prices to preserve their profit margins; instead, they can make greater use of their existing infrastructure and produce more units. This phenomenon activates economies of scale that spread fixed costs across more units, allowing businesses to absorb the impact of higher wages without passing it on to final prices.
Likewise, under the investment accelerator principle, businesses do not invest simply because liquidity is available or interest rates are low; they invest when they see their inventories running down. The revival of domestic demand stimulates productive investment (I), generating a virtuous cycle of endogenous accumulation.
Toward a fair distribution of income
A sustainable economic model requires a transition toward the framework of countries with a high distribution of income in favor of workers (PADI).
Historically, policymakers used wage restraint as an unsuccessful nominal anchor to curb inflation, drastically altering the functional distribution of income in favor of the operating surplus and to the detriment of labor.
Restoring wages is neither a populist measure nor an act of state charity; it is a necessity of macroeconomic architecture. It offers a path toward replacing subsidies for speculative schemes with a genuine boost to domestic production.
When society distributes rents and income fairly, the domestic market becomes the true engine of development, ensuring the viability of businesses and the multidimensional well-being of society.
