Studies of Economic Change

Step 3

As shown in step 2 of this chapter the impact of a low employment rate on taxes and duties can cause wages and income which reaches or even underbids the poverty line. In such a case the achievement principle is set out of order. And by this the social consensus might be put into question.

Therefore it is obvious that there has to be an adequate gap between the lower wages to the poverty line to ensure incentives for the people to work.

Consequently part A determines the limit of tolerance concerning the relation between the average (lower) wages and the level of the social welfare (poverty line) until which social stability can be guaranteed. If the wages fall below this level (caused by tax increases due to a decreasing employment) employed are expected to refuse to work which endangers the social wealth. The exact relation of the average wages to the poverty line which sets the achievement principle out of order is not subject to this study as it is not the purpose to find out quantitative results. Only qualitative results are intended at this place.

Finally part B determines the employment rate which causes average wages at the level of the poverty line according to the described relation: On the horizontal axis you can see the employment rate, on the vertical axis you can see the relation of the average wages to the poverty line. The average wages in relation to the employment rate resp. the level of taxes and duties is deduced according to step 2 part B. This line is shown as the red line in the diagram. The blue line represents the poverty line. At the intersection of both lines the critical point is reached which leads to a likely social breakdown.

Similar to step 2 cause and effect must not be mixed up:

The achievement principle is not out of order because of unreasonable high unemployment pays and social welfare,

but because the employment rate is too low resp. the unemployment rate is to high.

Note: According to chapter 2 the demographic development does not cause necessarily the decrease of the employment rate.