How would your family cope with 20% pay cuts? What if your customers got 20% pay cuts?

Edward Hadas, Martin Hutchinson, and Anthony Currie say, "American workers are overpaid, relative to equally productive employees elsewhere doing the same work. If the global economy is to get into balance, that gap must close. . . .  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." Are American businesses trying to reduce their payroll costs to that extent?  You bet.  For example, after restating the management challenge in Retooling Labor Costs, management consultants Booz & Company suggest techniques for getting high-quality workers—the same ones or replacements—to do the same amount of work for 15-20% less money.

Over time, compensation policies have gotten woefully out of whack, such that wages for some workers in some jobs greatly exceed what the market says those jobs are worth.

. . . .

Many managers have chosen to ignore this emotionally charged issue — especially when business is booming. This attitude is no longer tenable, however, given the pressure that established companies feel today to cut costs wisely in order to keep up with intense competition from both upstarts and emerging markets. In this environment, the gap between high wages and market value must be narrowed, if not closed.

. . . .

For many companies, the need to address imbalanced labor costs couldn’t be more urgent: New entrants are hiring people at deeply discounted market rates, taking advantage of today’s steep unemployment numbers, and widening the labor-cost gap with established businesses that have more entrenched workforces. However, any company seeking to meet this challenge must be ready to embark on a lengthy and extremely disciplined campaign — one that will determine the morale, skills, talent levels, recruitment potential, performance, productivity, and costs of its workforce for a very long time.

. . . . With proper execution, net labor savings of 15 to 20 percent are possible, because this approach goes beyond the need for immediate savings and confronts systemic and sometimes dysfunctional wage and salary practices.

Although this is perfectly rational behavior for US companies competing with domestic startups offering much lower wages to our vast numbers of unemployed and with the even-lower employment costs in Chindia, it gives further impetus to the 10-year downward spiral of American families and our economy at large.  Only federal policy changes can reverse this retreat from greatness, but first we have to notice what’s happening and decide to care.

Update on Wednesday, August 10, 2011 at 06:49AM by Skeptic

How would your family cope? Like this perhaps? Economic Uncertainty Leading to Global Unrest  (h/t Christine)

Update on Friday, August 19, 2011 at 01:06PM by Skeptic

Steve Keen uses technical economic analysis to show that, although reduced wage costs is good for one business, when everybody gets lower wage costs, everybody is worse off than with stable or rising wage levels--especially when there is a large debt overhang.  He discusses Keynes, Irving Fisher, and Paul Krugman's ideas on this subject as well as his own.

Deflation makes existing debt harder to service and may induce even more desperate price reductions, creating a downward spiral. Of course, if you're a bank this is good--up to the point where your debtors default and you can't pay your creditors.