One of the most notable demands made by Republicans over the auto bridge loans was that the Big 2 1/2 cut wages. Since wages of the foreign transplants like Toyota and Honda are pitched to be competitive with union wages, that will likely put downward pressure on their auto wages. All of this is very familiar to those who study unions, who know that management pays workers enough money to stop them from unionizing, which is why unions drag the wages up of even non-union workers.
Now something almost as ominous as deliberate government policy to drive down wages, wage cuts in the manufacturing industry (h/t Calculated Risk):
According to the employment consulting firm Watson Wyatt, 11 percent of all the companies it recently surveyed either already had cut wages or planned to do so over the next 12 months, and 10 percent either have reduced their employer 401(k) match or planned to do so.
Calculated Risk has a huge list of wage freezes, but it’s the actual wage cuts that I find interesting. If the economy enters actual deflation, wage freezes won’t be deflationary, but wage cuts are. A lot of economists have been talking about "wage stickiness", which is to say, companies rarely cut nominal wage amounts. Workers really hate taking pay cuts. They may not give you a raise for years, which when there’s inflation means your real salary is going down, or they may lay the workers off, but they usually don’t cut wages.
Or so the story goes. In fact, in industries subject to foreign competition, wage cuts have been going on for some time as concessions are forced with the effective threat of "we’ll move the job overseas". Still, even in those industries, wages have been at least somewhat sticky, and the main battle of the past thirty years by the Federal Reserve and businesses has been to sweat workers down by keeping wage increases below inflation increases.
Actual, widespread, nominal pay cuts means we’re going to really hit a deflationary spiral. And my guess is that wages for many folks are going to decline faster than prices.
Deflation of this sort is really really bad. As people lose buying power, and as they know that a dollar tomorrow is worth more than a dollar today, they stop spending. As they spend less, prices and wages decline more. It’s a classic reinforcing spiral. Huge amounts of industrial capacity goes unused because of declining demand and more and more people get their wages cut.
Republican ideologues who hate the New Deal will tell you that what FDR did wrong was precisely that he decided on unemployment over wage declines. As much as possible the Roosevelt administration tried to keep both prices and wages up. People who fell out of the workforce were given relief so they could continue to consume at a basic level, still eating and paying rent and so on. While it’s a fallacy that there’s only so much work to be done in an economy (you can always find more), it’s still true that if demand for your goods or services is falling, a company likely won’t need extra workers to produce that item. Slashing wages to save jobs in a deflationary period still leads to reduced aggregate demand. The people still aren’t needed. Thus, you lose most of the jobs anyway. You do save some jobs, but far less than one might think.
And, if you keep wages up, when the economy does recover, demand recovers much better because the workers being hired are being hired at better wages. If wages fall, they don’t recover when the economy recovers, and as a result, the economy doesn’t recover.
Long story short: we’re seeing signs of actual wage deflation. That’s bad and will likely be self-reinforcing. Good government policy in deflationary times is to try and keep wages and prices up, not down. One would hope the new administration will take the good government approach, and will end policies meant to deliberately drive down wages.
Related posts:
- The Downturn is Over for Wall Street, but Main Street’s is Still Going On
- Honor the Day: Get Obama’s Labor Nominees through the Senate
- The Song Remains The Same: Too Much Money At The Top of The Economy
- American Workers are Overpaid Says New York Times
- Jobless Rate Hits 26-Year High: Does Obama Have an Economic Team? Where’s Their Jobs Program?
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my employer cut most saltes staff from 6 days down to 2 and full time staff who had paid health insurance now have to contribute 1/2 of those costs
these are huge wage lowering decisions that are the only thing keeping us open right now
we will try to survive through the next busy season if it comes this year, if the economy doesn’t turn around I can’t see how we can continue operations
The bright side to this race to the bottom is that American workers may soon actually be able to compete wage-wise with China and other sweat-shop nations for their previously out-sourced jobs.
Long ways to go to be price competitive with 3rd world nations.
Maybe the same standards should apply to auto industry management!
First, benchmark their compensation to foreign standards.
Then adjust down for relative performance, since their performance sucks.
Then and maybe only then will I even consider blue collar adjustments, particularly in an industry where labor is not a huge component of cost.
so the economy lost nearly 600,000 jobs last WEEK… that’s a monthly rate of nearly 2.4 million jobs, and the rate is increasing. At this rate, shrub will have destroyed nearly every job his economy “created” since 2000, which, before the recession, was at only half the rate of job created needed to keep pace with population growth. The less-than-zero presidency. This presidency has been the greatest experiment in value destruction in two generations.
I think you are misinterpreting the report. 586,000 is the number receiving unemployment insurance. The INCREASE, or those who just lost jobs, was 30,000, or a monthly rate of 120,000.
Ian – I wish I could be sanguine about the situation. I’ve seen what happens when industries collapse growing up in the Pacific Northwest. The effect of the loss of jobs providing solidly middle class wages in the fishing and timber industries radicalized rural areas and allowed the growth of white supremacist and radical fundamentalist churches. We had domestic terrorism in the PNW in the 70s and 80s. I can only imagine what this will do.
I’ll assert that ensuring rights for the poor is the next civil rights struggle in the United States. Because I don’t see the elites being very willing to accept the structural changes that need to happen to prevent a broken economy and society.
here in the worlds 8th largest economy, the thugs are sittin on their hands. they say they might sue if dems and the terminator team up to solve the prob. 2 months till shut down and counting. 1.5 million per hour is the rate of bleeding.
NORAD has tracked Santa Claus who is now delivering presents in Australia.
oh I don’t know. These workers won’t be competing for toymaking jobs in Vietnam or brick kiln jobs in China. Sectorally speaking, the gap can be smaller than one hopes. At purchasing power parity, wages for a skilled assembly technician at a good (internationally competitive) company in a major Chinese metro is about $6.25-$8.00 an hour. If, over time, they allow their currency to rise to an appropriate exchange rate, as they had started to do before the present global disaster (which admittedly they won’t do in the middle of an economic crisis, but there’s every indication that their economy will recover ahead of ours, then who knows. Factoring shipping, international trade, and supply chain costs, and this wage gap may not be as much as one might think.
Well, we are a nation of whiners.
-G
I don’t think so:
“The Labor Department says initial requests for jobless benefits rose to a seasonally adjusted 586,000 in the week ended Dec. 20, from an upwardly revised figure of 556,000 the previous week. That’s more than the 560,000 economists had expected. “
With deflation in wages those who were barely keeping up with bills become unable to do so and bankruptcy and foreclosures go up. The spiral continues.
586,000 – 556,000 = 30,000.
that is one of the great quotes of all time.
I scanned the news story very quickly, but I thought the 586,000 is the number of initial claims (new jobs lost in the fact) and the 30,000 is just the increase in the rate of loss from 556,000 in the previous week.. in other words, the economy destroyed 556,000 jobs in the second week of December and 586,000 in the third week.
wall street is tryin ta make the case that all this deflation makes for a better situation fer the workin class. for example cheap gas so minimum wage workers can get to the jobs that make business owners their boat payments. i knew there was an up side ta this.
don’t think the race to the bottom has a finish line. at least not one i can see.
OT.
Nearly 60 rockets pound Negev desert in Israel in a sure sign that the Hamas ceasefire from Gaza has ended.
Israel weighs response.
-G
I see your point. I’ll defer to others on this. IANAE (I am not an economist)
Hmmmmm. Wage cuts vs. lay offs? In terms of aggregate demand (desire + ability to pay) for goods and services, I don’t see the difference. But, wage cuts would seem to distribute the grief more evenly.
if true that would mean unchanged aggregate demand if 1% of the population had all the income and the rest of us were made destitute. krugman says it’s possible to have an economy like that work. i don’t see it, but then ianae.
By the way, should we be demanding that the Southern Senators wages be pegged to what the wages of politicians in Germany and Japan?
-G
Work for whom? I guess Zimbabwe’s economy is working for Mugabe.
That may be the goal. No middle class, just poor workers.
that would be one great idea
I also think the legislators wage increases should be tied to the minimum wage as well
also companies that import products where there is no health care, 40 hour work week, etc should be tariffed, I cannot understand why this isn’t brought up, and comanies that left the states to use child and slave labor should be tariffed exponentially to get them back here
fixed that for you, they want a robber baron economy and think that when they have to pay their bills that is welfare
really, that’s what they believe
There was an excellent diary at DKos on that ‘match foreign workers’ argument. The diarist suggested that the CEO’s should then match foreign CEO’s. I don’t have the exact figures but most CEO’s in Europe and Japan make about 17-25 times the ordinary worker. In the USA, it’s like 350x.
But we’re talking about “workers,” people who pretty much spend what they earn. If so if aggregate wages go down by 1%, aggregate “ability to pay” for that group goes down by 1%, regardless of how that aggregate drop in wages is distributed.
But our CEOs are so exceptional; just ask Carly Fiorini
Let them eat cake.
While I’m on Short term disability which equates to a “fixed” income….. the parent company announced it will NOT be doing the end of year reviews for merit raises. All merit raises for 2009 have been differed to be reviewed in 2010. This is a large national company with multiple offices. The line was by not giving merit raises they can avoid layoffs.
My youngest son (college student) who works for one of the home improvement stores will cut his hours after Christmas which they have done every year. He has been scrambling to get enough hours now.
some good news http://www.cnn.com/2008/US/12/…..index.html
private equity firm shuts down an industrial bakery, laying off 300 workers. Someone buys it at the liquidation auction, and reopens it in time for Christmas.
Ah! The miracle of the efficient market in action.
And if you don’t pay them extraordinary amounts, they may go down the street and work for your competitor, after all! Can’t have that! (Even if some of the companies would be better run if their CEOs worked for their competition!)
I got an idea…… how about all those southern Senators do a trade….. They live and work like one of the auto workers even in the south AND try to pay all their bills and stay in a budget……
There was a segment during the primary where Obama and Hillary did a “walk in my shoes” day……. Obama followed an elderly care person. I was very impressed on the care he took, mopped the floor and even pulled up his sleeves to wash the dishes…. will not comment on HRC because I was not impressed.
OUR law makers NEED to do this on a regular basis to see how we live and work.
I think they should, at a minimum, be required to register as foreign lobbyists…
Maybe we could send them to China and they could outsource the jobs back here.
OT. Per MSRNC there has been a roof collapse at the Kohler plant in Kohler, WI
now there is the free enterprise system at work for ya.
More evenly, only if management also gets their wages cut. Preferably in the same proportion as workers, if not larger.
Long story short: Driving wages down — which started with Reagan — ruins an economy.
Wages:economy = fuel:automobile
The solution: Destroy southern values (slavery is good) and renew post WWII American values: we are all free human beings, and a thriving physical and social infrastructure is our American birthright.
So much for the propaganda about globalization providing better jobs to replace the good ones that get lost.
Recall hearing somewhere that during the days of European feudalism, it was made a crime for a peasant to even touch a member of the “nobility”. I can see why. If the peasant understands what the “noble” is doing to them, who wouldn’t want to murder them if they were within reach.
This was all predicted back when Al Gore and Bill Clinton was pushing GHWBs Nafta agreement and later GATT. This is the neo liberal consensus and I hate to say it, but Ross Perot and Ralph Nadar were absolutely right. GATT and Nafta wasn’t just about lowering trade barriers, it was about a system to “harmonize” laws, and especially wages. As many know the whole debt bubble was to stay consuming.
This situation will only get worse if free trade as we are currently participating in it is not changed. Bubbles are popping all over the economy, gold is going to $300-$400, steel is falling, oil has dropped, natural gas is below $6 per MCF but there was no bubble in wages. This is a terrible time for downward wage pressure when lower commodities can help home balance sheets get healthy after the commodities bubbles have burst. But, the nobles see other prices falling so pushing down wages is a natural reaction.
Now the scum come out of the woodwork from the IMF to tell us just how serious things are? Where the hell were they a year ago in December 2007 when the recession actually started? Do we really require another stuffed suit telling us how bad things are or how much more worse they are going to get? Obama has already tipped his had, reading the tea leafs by proclaiming it’s going to get a lot worse before it gets better.
But no matter how bad it gets, in order to lay claime that your a true blue American, you’ll have to pay a price for that previlage. The cost? Help those from Washington to Wall Street who bankrupted us by allowing them to enjoy the holidays and giving them their year end bonuses.
The most glaring example is AIG. AIG pays out $400 million in bonuses with taxpayer money. The Company defends this as necessary to keep top talent? Top talent? What the hell are they talking about? This is the “top talent” that created the multi-hundred billion dollar catastrophe that Henry Paulson is using taxpayer money to monetize, fraudulently I would argue. And make no mistake about this, I have looked at the publicly available numbers for AIG and have concluded that AIG will require at least $1 trillion to keep it alive. Others are finally somewhat agreeing as I’ve seen recent media published estimates of $400-500 billion. Eventually they’ll come my way. AIG is being kept alive with taxpayer money in order to defend the massive counterparty deriviatives risk exposure of Goldman Sachs, JP Morgan and Morgan Stanley, among others. This is the ONLY reason and taxpayers are subsidizing the nice Christmas that will be had by AIG and Hank Paulson all the other Wall Street crooks who are looting our system. I ask again, where the hell is the outrage?
Hope all enjoy the holidays as best they can. While the crowds from Wall Street to Washington dine on caviar and champaign compliments of the US tax payer and Congress, what’s left of the middle class gets to enjoy spam and Mountain Dew.
This looks to me like conservative phase II. They have spent three decades shipping real economy jobs to low wage locations overseas while building the American economy around Wall Street banks. This has been done behind two economic pieces of propaganda. The first is that somehow market fundamentalism will improve the economy and the second is the expansion of economic and financial globalism.
Now that they have moved the destruction of the American economy into high gear, they can actively lower wages here until American labor gets paid little more than Chinese labor.
This is accompanied by increasing income inequality. The Executives in big business and large banks get more and more income while everyone else gets lower income.
In short, the goal is to shift America to the same income structure as that found in Latin America, and we all know how well Latin American economies work for most of their citizens.
Interesting. Currently the Senators and Representatives get an annual pay raise equal to percent change in the cost of living. If instead they got pay raises equal to the percent change in the minimum wage, and the minimum wage was indexed to the cost of living, then the congress-turkeys would only get pay raises when the minimum wage went up, and no more increase than the minimum wage was increased.
Also limit Congressional pay to no more than, say, 20 times the median average pay, regardless of CPI.
Oh, and keep track of executive pay in the rest of the industrial nations and have corporate financial statements report executive pay as related to executives in Japan, Germany and some other nations. Report that executive pay for all executives above a certain rank in the hierarchy and pay distributions for those lower in the organization.
Right now with great effort you can find CEO pay, bonuses and stock payments effectively hidden in the SEC reports on the proxy statement. Make that another financial statement that is publicly reported and publicized.