Software Nerd

Sunday, November 08, 2009

Wages: Sticky on the downside

Economists speak of wages being "sticky" on the downside. What they mean is this: companies are usually slow to cut wages. New hiring freezes up very fast at signs of an economic downturn. Layoffs take place pretty soon too -- at least in the U.S. (not so in Europe, with its laws). For current-workers, wage freezes are common. However, wage cuts seem to be a last resort.

For most companies, this is poor economics. For most companies that are slow to cut wages, the main factor is a misguided ethics. Contrary to left-wing myth, managers usually feel good about paying their employees what they consider to be a fair wage, and managers often think of employees as being part of their team. Managers often feel it is their responsibility to try to keep their employees' wages steady. In addition to this, employees think the same way too. Therefore, they would often see a cut in wages as unfair to them.

This downward "stickiness" means that markets take longer to readjust, and to rebound.

Sometimes, companies will try "job sharing". This allows workers to work part time for less pay. It has the effect of keeping more employees on the payroll. However, if it does not reduce the actual wages-per-hour, it does not address the real issue: cutting costs. (It can be a good managerial strategy in some more limited slow-downs.) During the depression, Ford company had many workers working 3 days a week. Instead, if they'd been working all five days for what was previously 5-days pay, the company would have been able to make more goods for less. This would allow them to cut prices to customers. If there is insufficient demand even at those lower prices, then it is better for the extra workers to work in some other industry. This process of falling prices for labor and for goods would quickly work its way though the system and the end result would be a more efficient placement of capital and employees across industries.

Instead, politicians always try to slow the re-adjustment. This was Hoover's huge mistake post 1929. He called in businessmen and got their geniune committment to slow the process of readjustment; though he criticized the Smoot-Hawley law, he did not veto it increasing protectionism that slowed the process of re-adjustment; finally, instead of allowing commodity prices to adjust downward, he supported them (farmers wanted their prices to stay high). On top of all this, there were public works and cheap credit: two other ways governments stifle re-adjustment.

History surely rhymes.

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