Sentences of wisdom

by on November 11, 2008 at 1:45 pm in Economics | Permalink

However, there is no credible way for any firm to tell its employees, "You are getting a wage cut, but don’t worry. It’s just for macroeconomic reasons."

That’s Arnold Kling.  Here is much more.

1 talboito November 11, 2008 at 2:02 pm

Really? My experience is that this happens fairly often. My Fiance works for a large HMO, they’ve called a all-everybody meeting in two weeks. Be There, no exceptions.

The rumors are apparently more towards pay cuts than layoffs. No one is surprised that might be the case.

2 The Sheep Nazi November 11, 2008 at 2:39 pm

When employees are laid off, nothing prevents their new employer from offering them a lower wage.

That’s what the post talks about : why does the economy as a whole tend to adjust mostly by means of layoffs, instead of mostly by means of wage cuts. Read the whole thing, as they say.

3 angus November 11, 2008 at 4:25 pm

When you cut wages across the board, your best workers would be the first to leave.

4 josh November 11, 2008 at 5:59 pm

An argument for fairly low constant inflation. It’s much easier to not offer a raise.

5 mw November 11, 2008 at 11:53 pm

“An argument for fairly low constant inflation. It’s much easier to not offer a raise.”

Wouldn’t that be high constant inflation. The higher the inflation, the more an employer can cut real wages while not cutting nominal wages.

6 BillWoolsey November 12, 2008 at 6:57 am

I think that there is a way to show workers that the wages are being cut for “good” macroeconomic reasons. The measured unemployment rate and the CPI.

The first, however, requires that there is an output effect, and only then can nominal wage deflation allow a recovery at lower level of prices and wages.

Avoiding the need for nominal wage deflation still seems like a better approach to me.

During the thirties, however, the dominant view was that falling nominal incomes would exacerbate the recession.

While the notion that keeping prices and wages high in the face
of falling demand will help things has little support among
economists, during the years of Keynesian dominance, a lot of
rather weak arguments were used to claim that a deflation of prices would leave the economy depressed.

And most of the monetarist opposition had little interest in fighting that battle, instead favoring a monetary policy that
supports aggregate demand. (I count myself in that group.)

Anyway, my point is that “good macroecnomic reasons” to cut wages requires that workers have an understanding of economics
that has been controversial among ecnomists in the modern era.

7 srp November 12, 2008 at 7:38 pm

Kling assumes that wage cuts must be indiscriminate and across the board, so that the firm’s best workers will leave. But if you can identify the losers you want to lay off, you could also offer them and some others selective wage cuts so as to keep marginal cost below marginal revenue product. Picking out the smallest possible set and giving them 100% wage cuts (layoffs) is an extreme solution–why would this be optimal in general?

8 J Thomas November 15, 2008 at 9:24 am

Liberals think you can. And voters–all the voters, right up to the tippy-top corner office of Goldman Sachs–think so too.

The author of this quote ought to vote, provided he is a citizen who can vote.

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