Real wages tend to fall during a period of price inflation because monetary inflation and credit expansion, which cause price inflation, reduce the efficient allocation of resources. During monetary inflation and credit expansion, entrepreneurs are malinvesting capital and misallocating resources. Labor productivity of market value suffers and the purchasing power of wages is reduced, i.e., prices of consumer goods rise relative to wages.
Also, asset prices move more quickly than wages because of financial markets. During a boom induced price inflation, investors bid stock prices up in anticipation of the greater profit they expect in the future. Since investors are willing to pay higher prices for claims to the assets of the companies, the assets themselves have higher prices. But since there are no financial markets for labor, entrepreneurs must bid more intensely for labor in order for wages to rise. During the bust induced price deflation, investors bid stock prices down in anticipation of the losses they expect in the future. So, asset prices fall more readily than wages which only go down as entrepreneurs reduce their bidding for labor. Of course, the disparity depends on the accuracy of entrepreneurial foresight. If entrepreneurs have more accurate foresight, the “lag” of wages will be decreased and if they have less accurate foresight, the “lag” of wages will be increased.
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