Double-edged sword in pay cuts

June 5, 2009

Christopher Swann– Christopher Swann is a Reuters columnist. The views expressed are his own –

This recession is introducing many Americans to a novel experience — the pay cut.

Fifteen percent of employers surveyed by the Society of Human Resource Management reduced pay in the past six months — a threefold increase from earlier this year. Companies like Hewlett-Packard, Caterpillar and the New York Times have taken the pruning shears to wages.

Real pay cuts — when wages fail to keep pace with inflation — are commonplace in recessions, but you would have to look back to the 1930s for the last example of widespread cuts in nominal wages in the United States.

Since Keynes, many economists have treated nominal wage cuts as a virtual impossibility. In 1999, Yale economist Truman Bewley wrote the optimistically titled “Why Wages Don’t Fall During a Recession.”

Wage cuts cause huge resentment, damage moral and raise the risk of losing star employees. Bewley found American firms prefer to lay people off to “get the misery out the door”.

The notion that pay is rigid on the downside has been a cornerstone of much post-war economics. This assumption is now proving about as true for wages as it was for houses.

Pay cuts are threatening to make the leap from anecdote to generalization. The Employment Cost Index is already showing wages growing more sluggishly than at any time since 1983.

Downward pressure on salaries is intensifying. While job losses slowed in May, the unemployment rate jumped to 9.4 percent — the highest since July 1983.

Even this may not fully capture the current oversupply of labor. The U6 unemployment rate — which includes people working part time because they can’t find permanent positions — climbed to 16.4 percent.

With so many workers waiting in the wings, wages nationwide may start to fall over the next couple of years.

The United States would be following the path of Japan in the 1990s — the most recent example of absolute pay cuts in a modern economy. The impact on consumers could be worse than focused layoffs — spreading the pessimism over a broader base.

The Conference Board’s measure of consumers’ income expectations has dipped to the lowest level in its 21-year history.

Alpine levels of household debt — which has doubled to 134 percent of disposable income since 1985 — put consumers in a particularly vulnerable position. Lower wages make it harder to service loans and increase the incentive to defer spending.

As demand ebbs, companies cut headcounts and remuneration further. If companies use the money saved to grab market share by reducing prices the final piece of the deflationary jigsaw slots into place.

Pay cuts, far from averting layoffs, could increase them.

If the trend toward pay cuts increases, the economic consequences will be profound. The damage may be deeper than merely the erosion of spending power. Breaking the taboo on wage cuts greatly heightens the threat of a deflation mentality.

46 comments

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Haha,

The idea is that by having access to the code, you have the opportunity to practice. And that way you can actually become a good programmer if that’s what you want to do. Reading the book is important yes. But you can’t create a thing unless you’ve got something to work with. And that’s the idea I’m getting at.

In this economy you are expected to produce. But you don’t have anything to work with when you get started. And because everything is set up to keep you spending more than you take in, it can be near impossible to save up enough to have something to work with. Especially when what you save gets taxed to death.

Your standard of living will go down because there will be no money to protect you from hard times after having bailed out the business sector. Government controls the money so even if you think a bad business should fail, it’s not your choice. You can’t vote with your dollars effectively because the system is set up to keep most people in a paycheck to paycheck situation that compels consumption and stifles saving and production on an individual basis.

Your argument is that I don’t know the technicalities and so I have no room to speak. And yet for all of the speaking done by so called experts well… just look around you at the headlines.
They speak for themselves.

Our system requires financial inequality that forces people into poverty. No amount of technical crap speak can justify this. There is no way that economic theory can possibly prove that forcing people into destitution is good for society as a whole. And if anyone believes they can prove the good in forced poverty then I defy them to prove it.

We are going in the wrong direction. The economy grows from the bottom up. The open source movement demonstrates that giving access to the means of production encourages people to get involved and contribute. Prove me wrong. Otherwise your dismissal is just an empty post.

You speak of replacing the economy. But you have no economic knowledge.

You ask for people to provide flaws in your argument. So people help point out flaws to you. Economic flaws in your plans, which make them *unworkable*.

You don’t understand those flaws. So you dismiss them. Then you carry on, saying “my argument has no flaws”.

And then we end up back at step one.

So there is almost no point in continuing any meaningful discussion with you. You are not looking for debate or critisism. Just people to preach to.

The best I will give you is this:

Money is NOT a factor of production. Or a means of production.

Any attempt to evenly spread out profit will not work. Because while there may be tangiable returns, the returns will not equal the cost. The system will stagnate and collapse.

And all the preaching in the world will not change that fact.

Posted by Haha | Report as abusive

Haha

I said nothing about replacing the economy. I suggested that the government redistribute tax money that goes to poorly run programs back to the people.

You haven’t pointed out any flaw other than to say that I’m not an economist. Okay… that’s well established.

When I ask you to tell me how forcing poverty is good for society you tell me that I need to understand economic theory. So you tell me then.

Enlighten me. I’m not an economist so tell me how forcing poverty on citizens is good for them. I’m not pointing to economic technicalities. I’m pointing at the fundamental direction our economy is taking. We have people living in the streets, and pensioners having to compete with young new workers because the fruits of their sacrifices have been stolen and destroyed by others who control what the worker depends on.

How is homelessness good for society? How is it that people dieing for lack of money to buy health care is good? How is it that an economic system that requires these conditions in order to function good. I don’t need to know the language of economics to see the result of these ideas at work. And you’re really going to have to answer the question if you think you’re going to get anywhere with me. So don’t bother replying if you don’t have the head for this.

“The best I will give you is this:

Money is NOT a factor of production. Or a means of production.

Any attempt to evenly spread out profit will not work. Because while there may be tangiable returns, the returns will not equal the cost. The system will stagnate and collapse.

And all the preaching in the world will not change that fact.”

Do you have proof of this or are you just crunching numbers.
I can point to the open source movement as proof that when code is distributed the returns gained exceed the investment because innovation increases the usability of the code.

Unless you have something that proves money will behave in this way then you have nothing but an unproven theory. And so far the economy sucks so if that is the best you’ve got then maybe you need to read up on more of your theory.

Oh… and if money is not a factor in production then why are we having all of this financial crisis? If money is not a factor in producing anything then why not work for free? Money facilitates the exchange of resources. If you can’t exchange resources then you can’t produce to any significant degree unless you own most of the resources yourself which most people don’t.

By allowing people an equal base from which to exchange resources the innovators can innovate. Try telling the young person getting an education that the return on that investment is wasted.

You basically said in your response to me that people are not worth investing in. And THAT is the problem with this economy. You still value money for its own sake instead of valuing it for how it can serve the person.

I have nutted out the problem we have here.

-You ask for criticism.
-I provide it. Based on economic theory.
-You reject the criticism. Because you don’t understand economic theory.
-You ask for proof the theory is correct.
-I tell you that proof is in the economy.
-You reject that proof. Because you don’t understand economic theory.
-You ask for criticism.

And so on, and so on.

You are not in a capacity to understand the criticism being made of your position. So regretfully, I can not see any way to engage in any meaningful debate with you.

If you want your questions answered, then do the research yourself.

To start yourself off, type in “Money is not a factor of production” in Google and work from there.

Posted by Haha | Report as abusive