How Sticky Are Wages?

David Leonhardt on deflation, Wednesday:

The drop in prices, which isn't over yet, will make life easier on millions of people. It's possible, in fact, that the current recession will do less harm to the typical family's income than it does to many other parts of the economy.

The reason is something called the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers' pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

Fedex press release, Thursday:

FedEx is now implementing a number of additional cost reduction initiatives to mitigate the effects of deteriorating business conditions, including:

Base salary decreases, effective January 1, 2009:
* 20% reduction for FedEx Corp. CEO Frederick W. Smith
* 7.5%-10.0% reduction for other senior FedEx executives
* 5.0% reduction for remaining U.S. salaried exempt personnel

Fedex is largely non-union, which means that most workers are taking a pay cut. I'm not sure this is necessarily a bad thing, if it avoids layoffs and reductions in service quality, instead spreading the pain around more thinly. But it does point to the possibility that this recession will indeed be different, and that it might mark the beginning of the end of sticky wages.

There's been a huge shift in power in recent years from labor to capital: Corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts.

Comments

[Alex Filonov:]

Translation: deflation is here to stay. Welcome Great Recession, if not Great Depression 2.0.

2008 Dec 18 11:04 AM

[jimmy46:]

This sticky wage problem goes back to Heebert Houber and the great depression.
People think his high tariff policy was the big mistake, but that was a needed follow on to his main policies, which were:

HIGH WAGES,
and
HIGH PRICES

Hoover was unhappy with the wage cuts he saw during the 1921 recession
and as president vowed that wouldn't happen on his watch.

He jawboned corporate leaders not to cut wages,
he made them pledge publicly not to cut wages,
he set up a federal board to snoop around the country looking for any violations.

To pay for high wages he believed in high prices for both factory goods and farm goods.

Unfortunately, no other country followed this policy and cheap imports cut into sales, SOOOOOOOO

he pushed congress for high tariffs to protect his HIGH WAGE HIGH PRICE
policy.
When Roosevelt became president, he embraced this plan as his own and it continued thru WW2.

It was stupid and wrong.
It was the reason the depression in America was worse than in the other industrial countries.

AND YET FOR THE LAST 70 YEARS WE STILL BELIEVE IN HOOVERS FAILED IDEAS.

It's time to rethink this idea.
The president should encourage companies to cut compensation by 5%
across the board. Make a break with the past.

This would lower costs and prices, making goods more attractive to buy,
it would also help the trade deficit.
With lower costs we would sell more to others.

Hoover may be long dead, but his ideas still live and hurt us.

2008 Dec 18 01:35 PM

[jimmy46:]

Other benefits:

Companies wouldn't lay off so many people,

so there wouldn't be the great divide between those who still have a job
and those out on the street.

2008 Dec 18 01:40 PM

[prudentinve...:]

Assuming their affected workforce are all equal performers, it's better for 1000 workers to get a five percent pay cut than for 50 workers to be jobless. However, companies sometimes use recessions to shed off ineffective workers.

Fedex should be applauded that the pay cuts started at the top.

2008 Dec 18 03:15 PM

[John Lounsbury:]

A little humor about prudentinvestor's comment regarding ineffective workers and Fed Ex making pay cuts at the top.

Dead wood at elevations above ground in the woods is referred to as a "widow maker" because it kills when falling to the ground. Perhaps Fed Ex should consider personel cuts at the top instead of or along with pay cuts. Are there possibly any "widow makers" at Fed Ex?

Now, a serious comment. A problem that any company has with pay cuts is that their most talented personnel may be coveted by another company. Across the board pay cuts run the risk of causing the best talent to leave for greener pastures and the ineffective and less effective personnel to hang on. I have been through these decisions in my corporate management days, and the best way to handle this is never obvious.

2008 Dec 19 12:44 AM

[carey_jim:]

At the start of the Great Depression, Herbert Hoover made a very smart move when he called businessmen together and told them to hold wages steady and to take their loses in the form of reduced profits instead.

This move was intended to keep consumption high in order to lean against the forces of recession.

It seems pretty obvious that, similarly today, falling wages will decrease consumption even further and contribute to the recession.

This request to the leaders of business was only one of several intelligent moves that Hoover made to keep the recession from turning into the Great Depression. The other one was massive public spending to keep the economy moving: The Boulder Dam and the Golden Gate Bridge are the most famous of such projects.

Programs started by Herbert Hoover, such as the Reconstruction Finance Corporation, formed the core of the New Deal policy of Franklin Roosevelt.

One of Roosevelt's New Deal policy advisors, Rexford Tugwell admitted what for political reasons, no one would admit at the time:

"practically the whole New Deal was extrapolated from programs that Hoover started" www.pbs.org/wgbh/amex/...

Contrary to public opinion, if Hoover had been elected in 1932 it is possible that his intelligent policies might have avoided the Great Depression and turned it into just one more nasty recession of the kind we saw in 1920-21.

We are living in dangerous economic times. We had better keep our powder dry and our intelligence functioning.

2008 Dec 20 01:45 PM