Adjustment Mechanism

From a theoretical point of view, the business owner/employer may react in five ways to an increase in salaries; out of these five possibilities, only the last one would have an inflation spiral effect due to its direct impact on prices; the rest would have a marginal effect and would surely affect other variables; the options are: (1) Reducing the workforce, either in the number of workers or in the number of hours worked (2) “Deformalizing” 2 his workers (3) Reducing his profit margins (4) Seeking alternative ways of increasing productivity and (5) Transferring the increased salary costs directly to the final prices of goods and services..

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