Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.
Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.
First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.
It’s true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the Bureau of Labor Statistics, the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn’t be at all surprising if overall wages started falling later this year.
But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?
The answer lies in one of those paradoxes that plague our economy right now. We’re suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We’re suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.
And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.
Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.
But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.
In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.
Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.
So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilizing the economy isn’t enough: we need a real recovery.
There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year.
But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.
To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.
Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.
* By PAUL KRUGMAN (NYT; May 4, 2009)
Now, we can read Some comments:
One big reason for falling wages in the USA seems to be that 90 percent of the rest of the world will do the same job cheaper. As standards of living and technological ability rise in India, China and the rest of the developing world, ours will descend.
— Peter Jaffe, Bangkok, Thailand
Sorry but I don’t think you really explained why cutting wages leads to higher unemployment (“when employers across the economy cut wages at the same time, the result is higher unemployment.”). Surely it can’t be any higher than if wage cuts were not done in the first place? The example of XYZ company does not really explain this so called paradox because you sign off with a statement that is unrelated to the original claim : “Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.”
Fall in wages and deflation seem to be two sides of the same coin to me.
— Girish, San Francisco, CA
Mr. Krugman offers an assessment that we all know but not a real solution because he needs to be politically correct. That is what wins awards and invites to TV shows. Wages are a matter of supply and demand. One can’t demand higher wages when there are a lot of jobless people or foreign workers who will work for less. The decline in wages has been happening for a long time, the burst bubble just accentuated it.
Technology, by design eliminates jobs. So a technological society needs fewer people to run it. In addition, when a job goes overseas, it is not only that job that is lost, but all of the backup and support jobs as well. So between a highly technological society shedding jobs and jobs being lost to outsourcing there is little growth in high end jobs. Then while this has been going on we have had incredible amounts of immigration to finish the American middle class off. Some liberal economists have written that this immigration is unnecessary and that the only new jobs being created by it are service sector jobs to service the growing population. This is the mess we have ourselves in. Does anyone believe we have college graduates working as telemarketers because there is shortage of college graduates. Its a shortage of decent jobs. In a recent comprehensive study by a Wharton Buriness professor and a Stern Business professor it was shown that imported high tech workers lowered the wages by 6% and 2-3% for specific managerial jobs. Union construction workers now comprise less than 20% of the construction industry. High wage Union workers have been replaced by low wage illegal immigrants. This drop in wages has been basically from top to bottom for workers.
What lies ahead is much worse and it is certainly not talked about. We have had consecutive bubbles which have helped mask the problem. Now that the bubble has burst we have excess labor being squeezed out of the system in the form of high unemployment. This unemployment will continue due to the above mentioned conditions. So unless there is another bubble we will have permanent unemployment which means permanent lower wages for those working. Japan is trying to address this problem by giving financial incentives for its foreigners to leave. This is what we should be doing if we want to raise wages. The U.S. Chamber of Commerce, agribusiness and billionaire high tech entrepreneurs may not want to hear this but there is no way that injecting 40 million people into a developed society will be benign.
— John, New York
Job creation is the most urgent problem this nation faces – and it seems to me that Obama’s infrastructure project is a step in the right direction. Many of us in the dying middle class have been laid off and simply cannot find jobs, let alone jobs that pay living wages. So direct stimulus is a band-aid at best, and available credit that cannot be secured or repaid will not buy homes or cars or university educations. Jobs first.
But will corporations ever bring back those outsourced jobs in production, manufacturing, IT, accounting, and customer service? How do we get back to work when there is no work to be had? Are all of us who were project managers, marketers, and PR people irrelevant in a world where engineers, entrepreneurs, innovators and architects are needed?
Maybe the direct stimulus that’s needed is help in getting people back to school to learn real skills that will help America transition to a green, energy independent nation that creates goods and services.
— S.P., Saint Louis
This recession/depression will never end until median wages start to go up. We might achieve some ‘technical’ growth, but the economy will be weak and unstable until there will be wage growth.
What this means is that the depression will go on indefinitely. Why? God forbid we give the median worker a raise.
The median worker hasn’t received a raise since 1974. That’s 35 years. In those thirty five years GNP has gone up 150%.
What that means is that even though productivity has increased 150% – all the rents associated with that increase in productivity has gone to the wealthy – the median worker got nothing. Nothing in 35 years.
What that means is that trillions and trillions of dollars have gone to the “supply side” “1%ers” “investing rich”, year-in and year-out, for decades.
Let me repeat that: Trillions of dollars, year-in and year-out, for decades.
Get that: all the purchasing power is locked up on the ‘supply-side’ of the economy and it is constipated – it is not trickling down. Demand is shrinking in the absolute sense.
(When demand shrinks relative to supply, that means investors can’t make good returns on their investments. Over time that leads to investment bubbles and fraudulent investment schemes – subprime loans, credit card loans, payday loans, ponzi schemes, credit default swaps etc – from investors trying to get a good return on their investments.)
Asset values collapsed because there was no purchasing power left on the demand side of the ledger. This was masked for a long time by the massive borrowing in the economy. Take away the debt and you have collapsing demand, collapsing asset values, and a collapsing economy that can’t turn around.
This economy won’t recover – ever, without wages recovering. This is a simple fact.
Without recovering and then rising wages, the economy is a house of straw – highly unstable and prone to further collapses until it finds a new equilibrium in something like a third world economic status.
The best structural thing that can happen to the economy is we get increased union representation (see “Card Check”). Some CEOs have called ‘card check’ the end of civilization – As if we aren’t already living in a post civilization economy.
Personally, I think a CEO making 400 times the workers salary and getting raises and bonuses even during years when the company loses money – to me that’s the end of civilization.
After we get card check, we need to make some adjustments to our laws on corporate governance.
There’s no way shareholders interests are being served by CEO’s capturing as personal gain so much of the rents that the corporation earns. As a shareholder, if I can’t have those rents, I would rather see it spread around to more employees because that would mean better employees, more stable workforce, higher productivity across the corporation, not just in the executive suite, and would contribute to a more stable over all economy.
Somehow, our corporate laws are not serving shareholders and our labor laws are not serving workers, just CEOs. Things are fowled up on multiple levels.
— Tim_Kane, Mesa, Arizona
This article is incomplete in that it does not mention continued offshoring by our large corporations, including several of the banks now receiving billions in welfare. A recently published study “H-1B Visas, Offshoring, and the Wages of US Information Technology Workers” by Prasanna B. Tambe of New York University – Stern School of Business and Lorin M. Hitt of University of Pennsylvania – The Wharton School aims to dispel “the myth that globalization generates no losers,” the authors state:
Our estimates indicate that H-1B admissions at the current levels are associated with a 5-6% drop in wages for computer programmers and systems analysts. Offshoring appears to lower the wages of a slightly broader class of IT workers, including IT managers, by about 3%. These effects are larger for employees exposed to external labor market forces, such as new graduates or job-hoppers.”
I work in the tech industry and have seen my wages fall in actual terms since the year 2000. In 2004 I made less then in 2000, and I now make less then I did in 2004. I have a MS in Computer Science, speak and write perfect English (I majored in the subject), and was born and raised in the US and am basically an average guy. I spend hundreds of hours a year of personal time reading and programming at home to keep up on new technologies. I develop web sites using http://ASP.NET and C# – I am not some antiquated mainframe developer who has not developed new skills. Yet when I send out resumes to try and find a higher paying job I get few callbacks and when I do they want me to take a paycut and a 3 month contract that MIGHT lead to a job, usually with the promise of a lateral salary at best.
The only silver lining I see about wage cuts is the rest of the country will see what we in the software industry have been experiencing for years – that wage cuts are a very real possibility and there’s no reason why they won’t continue.
— Mike, Kansas City