by Xerones

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.