Monday, December 22, 2008
Wage Deflation Underway
Price deflation isn't necessarily a bad thing if it is short-lived and does not lead to downward pressure on wages. But falling wages produces a nasty spiral. Not only do consumers have less to spend, but worse, even if they keep their jobs, they can be legitimately worried about even lower pay packages down the road.
Of course, wages may simply fall in correspondence with prices, purchasing power could be maintained. But with memories of gas and food price rises still fresh (and I am still seeing meaningful food price increases), workers have good reason to be concerned that their standard of living could fall. And that does not include the nasty factor that most consumers are carrying debt, both mortgage and personal which is unlikely to deflate in line with a reduction in earnings (although Bernanke is doing everything in his power to engineer that)
And even if that wage earner squeeze is illusory (ie, deflation is symmetrical enough that his standard of living is intact), he is exposed to commodity price increases. Fed policy is indifferent to the dollar; in fact, Bernanke would probably like to see it considerably lower, since the 1934 devaluation played a big role in putting the US back on the growth path (policy errors in 1937 put the recovery in reverse). But, say a 30% to 40% fall in the dollar means considerably higher energy and food prices, which hit the vulnerable particularly hard.
Fedex is cutting pay 5%. In the UK, tens of thousands of workers are having an extended Christmas holiday as employers shut down through Jan. 19 to conserve cash. Cerberus has offered its New Page (coated paper mills acquired from Mead WestVaco) union employees a four-year contract with no wage increases the entire time, benefit cuts, and reduction of overtime. That's tantamount to a pay cut.
The New York Times gives more examples of pay reductions, generally in the form of short workweeks or unpaid vacations. However, the Times candy-coats this development, presenting it as a "win-win" that saves jobs, as opposed to a further grinding down of workers who have had stagnant real wages since the mid-1970s. Admittedly, so far employees have reportedly gone along with these moves. But I must cynically note that everyone quoted in the article is either a manager, an expert (a consultant or academic) or if a worker, was presumably interviewed with management's knowledge. And let's face it, labor has no bargaining power in the US. Acquiescence is the only option.
From the New York Times:
http://www.nakedcapitalism.com/2008/12/wage-deflation-underway.html
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