Bryan Caplan and Arnold Kling, among others, should be very pleased by the news about public sector wage cuts:

Local and state governments, as well as some companies, are squeezing their employees to work the same amount for less money in cost-saving measures that are often described as a last-ditch effort to avoid layoffs…

Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off. Warning that they will have to lay off people otherwise, many governors and mayors are pressing public employee unions to accept a reduction in salary of a few percentage points, without getting days off in exchange.

The article provides only anecdotal data, but references a “new report” (which is neither identified by name or linked to) showing a drop in hourly wages. Actions like these could prevent large drops in government employment that keep hearing are around the corner, but it won’t prevent a huge drop in income, so it’s unclear whether this helps us dodge any macroeconomic bullets.

In addition to governments, businesses are cutting wages to. But the wages they are cutting are not what you’d expect:

While most of the pay cuts seem to hit unionized workers, David Lewin, a professor of management at the University of California, Los Angeles, who has written extensively on employee compensation, says some cuts are also quietly taking place among nonunion employers.

For public sector jobs one can see why this might occur: around 37% of the jobs are union. But in the private sector  somewhere around 7% of jobs are unionized and they should be more difficult to lower wages for. So why are union jobs being more affected?

One argument is that non-union workers get fired when the firms demand curve shifts leftward, and the higher marginal productivity of the remaining workers means that wages don’t have to fall. Union workers, in contrast, can’t get fired, so wages have to fall. Another possibility is the threat of replacing everyone with scabs or going out of business is a parameter in union wage bargaining but not the non-union wage bargaining, and while lower marginal productivity of labor is pushing everyones wages down, these threats are further reducing union equilibrium wages.

The simplest explanation is just that the industry composition, e.g. the large share of manufacturing and construction, of union jobs versus non-union jobs is driving it.

Either way, I would prefer to see public sector unions lose power rather than wages, since their power simply means that the wages will return to trend once the recession is over. I think a large state and local government aid package conditioned on power being taken from public sector unions would be a good bargain for republicans to make.  Not going to happen though.

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