We’re all in this together.
Wednesday, November 25, 2009 at 03:22PM Tom Petruno reports on pay cuts and the downward trend in the US employment cost index, primarily in the context of the Great Recession, but the included graph shows this is a long-term trend. See also this post and this one for confirmation of the long-term trend. It's related to globalization, and there are those who favor continuing to drive down US labor costs and say we can't have full employment unless we do. From the Petruno piece:
There is, however, a hard-core camp in the economics world that believes the only way to put America's new army of jobless back to work is via a deep reduction in labor costs overall -- enough to make the U.S. far more competitive with overseas rivals.
Among the economists espousing that view are Edward Hadas, Martin Hutchinson, and Antony Currie of Breaking Views, and they say US wages should go down as much as 20 percent:
The big trade deficit is another sign of excessive pay for Americans. One explanation for the attractive prices of imported goods is that American workers are paid too much relative to their foreign peers.
Global wage convergence is great for the poor but tough on the overpaid. It’s possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance.
Many members of the professional and managerial class and small business owners presumably agree. They should reconsider. It's not going to be possible for them to maintain their incomes and revenues if their customers and taxpayers have declining incomes. Henry Ford understood this in 1914; everybody should understand it today. Globalization is a terrible thing for America.
Skeptic
University of Chicago economics professor Gary Becker and federal judge Richard Posner, who share a blog, both argue that the best way to reduce unemployment is to drive down wages. Becker:
The usual suggested remedies are either to stimulate demand for labor, or to reduce the real cost of workers to employers. The stimulus package has tried to stimulate demand. While I believe this package has failed to stimulate demand to any significant degree (see the discussion my earlier posts on January 11, 18, and November 1, 2009), and that the claimed employment effects of the stimulus are vastly overstated, I concentrate my discussion, as Posner does, on reducing the real cost of labor to employers.
If rigid nominal wages were the culprit, inflation would reduce the real value of labor costs, and hence stimulate demand by companies for workers. But deflation rather than inflation is the greater worry now, so this approach does not seem feasible at this time. The alternative is to cut the cost of labor to employers. . . .
It is wiser to cut labor costs in other ways. I fully endorse Posner's suggestions to cut the minimum wage, but I do not see that happening with the present Congress.
Hoover's Treasury Secretary, Andrew Mellon, would have approved, as he reportedly advised Hoover to "liquidate labor." Obviously, Becker and Posner are not "in this together" with the unemployed.
Skeptic
The recommendation to reduce unemployment by reducing the minimum wage, made recently by Becker and Posner and by others, has been attacked (successfully, I think) as being bad economics by Paul Krugman here and by others referenced deeper into the PK thread.
Reader Comments (1)
The people who agree that the declining pay scale is a good thing for America should live in a world where they can see the reality of poverty level wages for the middle class. Then they can ask themselves if they want to live in a third world country. Corruption is bad enough in the US now, but it becomes completely uncontainable in a country when survival depends on taking/giving bribes and it will affect absolutely everyone.