Steve Pearlstein’s recent article suggesting that we need wage cuts to correct unemployment have gotten a lot of attention. To the extent that this is sold as a way to fix the general problem of unemployment, I agree with Yglesias that because this will increase the real value of household debt it’s probably not the best way of going about it. If we were in an inflationary environment, or even getting a normal level of inflation, and unemployment were persisting due to structural issues, then wage cuts could help as a general solution.
On the other hand, to the extent that wage cuts lead to more hiring it is identical to job sharing that so many progressives seem so fond of. I’m guessing those that support job sharing but not wage cuts are worried that the link between cuts and hiring will be broken if it is optional for employers. But then the problem isn’t debt deflation per se, but debt deflation without enough of an employment increase to offset it. In this case it’s really an empirical question that can’t be waved away by theory alone.
Overall I think the case of wage cuts as a general solution is not strong, but I agree with Pearlstein when it comes to particular industries. The auto industry for example is clearly undergoing structural changes; GM and Chevy did submit restructuring plans after all. You can point to an undervalued Yuan as a cause for our lack of overall global competitiveness, but anywhere that tradeable goods industries have wages above domestic market levels devaluing the dollar will only get you so far. Industries with strong labor presence will be among these- and yes there are fewer and fewer union workers but 13% of the private labor force is nothing to sneeze at. Minimum wages, other labor market restrictions, and non-regulatory labor frictions like debt induced labor immobility would apply here as well.
We’re not just concerned about employment in tradeable goods however, which is why, as Dean Baker points out, we should be looking to high skilled service industries for places where wages are above market level (although he overstates the case with banks). We should be looking harder at the laws that cause these high wages and finding ways to loosen or repeal them.
We shouldn’t just be talking about private labor markets either. Matt Yglesias asks how we know when public sector workers are overpaid, and suggests a lack of a general problem, e.g. “[w]hether or not Michigan is overpaying janitors at state office buildings has no logical relationship to the appropriate compensation level of federal bank regulators.”
But we do know that a union wage premium exists in public sector just like it does in the private sector, so that anywhere that public employees belong to a union, wages are going to be higher than they otherwise would. Well how high would they otherwise be? This will be a function of how much local politicians can convince voters that they should be willing to pay for the services they receive, and what kind of wage/quality tradeoff the bureaucrats responsible for the particular public service decide. This won’t be perfect, but I can’t see any convincing reason why this would be systematically too low such that unions would improve it. Also, keep in mind here that unionization doesn’t just come with a wage premium, but a union preferred wage setting mechanism which can undo any quality increase that the wage premium might get you. Teachers unions come to mind here.
Finally, I’ve noticed that we are now talking about taking energy subsidies designed to ameliorate climate change out of the hands of the democratic system that brought us ridiculous ethanol subsidies and other debacles, and placing into a technocratic evidence based institution like the National Institute of Health. Maybe states will get desperate enough to bring solutions like this to labor markets, and appoint technocratic institutions to design labor market policies. Democracy fundamentalists will shudder at the notion, but governance is getting worse just when we need it to be getting better. Drastic measures seem in order. I’m not suggesting this is necessarily the best way to go, but it’s something we should be considering.
5 comments
Comments feed for this article
Thursday ~ October 14th, 2010 at 9:56 am
Johnnie Linn
Jobs are underpaid if they are hard to fill or keep filled. Jobs are overpaid if there are long queues of applicants for openings.
Consumer debt overhang would appear to be a Pigou effect in reverse. Maybe the Fed could buy delinquent credit card accounts like it has been doing for other toxic assets and remand the interest to the debtors, like it does for Treasury debt. Then the cardholders would only have to pay principal.
Thursday ~ October 14th, 2010 at 10:08 am
Rebecca Burlingame
I’m starting to think that some of the job mobility problem is due to the fact that those increased wages at the bottom helped raise rents significantly. Whereas ten years ago the lower wage worker had to pick affordable cities carefully, now there are not many affordable cities left, because of room rents starting at $500
Thursday ~ October 14th, 2010 at 12:38 pm
Wonks Anonymous
The public sector has a lower quit rate. So we could afford to pay them less without too many leaving for greener pastures.
Thursday ~ October 14th, 2010 at 11:38 pm
Reflating Wages to Reduce Unemployment | Collective Conscious
[...] does it mean to have competitive wage levels? Would lower wages reduce American unemployment? Let’s think about [...]
Friday ~ October 15th, 2010 at 1:37 pm
Paul Petillo
Wonks is right. The public sector has a lower quit rate but that is not due to wages but benefits (healthcare and guaranteed pensions). It also is an industry without any worries about workers leaving for work in another city. removing the costs of insurance and retirement makes the wages seem adequate enough and adjusted for living in one area over another. Rebecca is sort of right but I believe that rents are still determined by demand (with an increase in foreclosures, people have swelled the ranks of those looking for rental units). And Johnnie suggests that queues determine need, which if they were handing out food would be the case. But these lines are populated by those who are hopeful, not necessarily the right person for the job – which the employer can be highly selective in offering. Low wage jobs will always be available, hence no line. But long-term unemployed people see those jobs as a risk and worry that they will not being ready to sieze the next-best job opportunity if they are grilling burgers.
The current vilification of public sector unions is misplaced but highly understandable. Think of unions as settling for a nickel when those without labor agreement seek the dime. Remove the ability to chase the dime and you begin to envy those who took the nickel – doubly so if you see yourself as the employer via taxes.
Unions provide wage stability like no other mechanism yet we are uncomfortable using what these workers have as the wage bar for what we want. It was supposed to be the other way around. To listen to certain groups, unions breed mediocrity by creating the average worker which in turn creates the much needed middle class. But they don’t really. People can rise through the ranks if they so choose in the same way workers outside of a union agreement can. To do so, requires a job. Opportunity is the new wage bar and there doesn’t seem to be much of it available. But that’s not the fault of those who want work.
You brought up teachers, Adam. A thought was pointed out to me the other day that seems all but absent in the argument about teacher unions. Tenure is an administrative gift not a contractually bargained for item. That seems to make much of how we view the public debate about this union, other public unions and even private sector labor organizations as a moot point.
Unions never intend to bargain their companies out-of-business and most are willing to make the needed concessions to ensure employment. The problems arise when the companies don’t see their amazing profit margins as part of the debate on who should get paid what.