Did you read the link?
I guess I'm missing the profundity here: people have gone without wage increases for a long time now, and the issue is no one has been buying anything due to all of economic pain people are under during the recession.
What is the surprise worth inches in the NYT?
Did you read the link?
Uh, yeah.What the paper shows is that many, many workers are getting precisely zero wage growth in dollar terms:
Duh.And there has been a sharp increase in the fraction of zero-wage-change workers
So that's the amazing data, and then he provides his opinions on what that means beyond the data itself:
Is that really shocking?The prevalence of zero-change wages constitutes overwhelming evidence that we’re suffering from lack of demand, not lack of supply.
Anyone living in the real world has seen salary cuts on top of massive firings in the last 3 years. A few people who have uniquely high value skills have managed some minor increases in the forms of special bonuses or out of the box minor increases to keep them from jumping ship, but most people have had wage freezes or wage cuts in the last 3 years of this recession.
And as a result, people have not been buying stuff. Which of course is a vicious cycle, as the lowered demand for stuff makes it even more difficult for the companies, who make stuff, to raise their wage budgets.
And yeah, he goes on to say that what people are trying to do to address the problems in Europe by measure such as reductions in nominal wages is really hard.
Again - I'm not sure what the Eureka is here. I assume I'm missing something, because, while Krugman is a biased hack, he usually isn't stupid with data.
A lot of people are against possible demand-boosting measures by the Fed, because they argue that Wiemar-style hyperinflation is just around the corner. This undercuts their arguments.
Interestingly, from the original paper:
If they have the data to back it up, this flies against other data and my observations across a couple of industries in which temporary wage cuts have been the norm during this recession.Despite a severe recession and modest recovery, real wage growth has stayed relatively solid. A key reason seems to be downward nominal wage rigidities, that is, the tendency of employers to avoid cutting the dollar value of wages. This phenomenon means that, in nominal terms, wages tend not to adjust downward when economic conditions are poor.
Yeah, what Mike said. The completely obvious is apparently "controversial" in economics now. The interesting thing about the graph is that huge, inexplicable spike right at 0; the labor market really does not hand out same-job wage cuts in recessions.
I disagree. They hand out a lot of 100% pay cuts.
I am a little dubious of their premise, which is based on a paper from back in '86 that I not only read back some time ago (but more miraculously, remember that I read, because it was part of an exam when I got my MBA.) The key assumption that is a foundation of their paper is this:
I really think that is a flawed assumption in this particular recession, as true wage cuts have been extremely common this time. In fact, the numbers I have read is that average wage cuts have been in the range of 4%-10% based on annual wages. Most of the people I have talked to in the manufacturing and chemicals industry have told me their company froze salaries and then imposed around 10% cuts - the only variations I have seen has been whether they were across the board or graduated (we had some cuts here, but no forced firings, which was extremely unusual but something we committed to, and the higher level you were, the higher the cut, so that the lower level folks took very little reduction, and those of us at higher level took a pretty good cut - the premise being, obviously, we could afford it more.)If they [employers] want to reduce real labor costs, they must cut the actual dollar value of wages. Employers generally avoid doing so because cuts to nominal wages can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986).
Anyway, at work so haven't had time to do more than skim the original article, but I am skeptical that Thaler's principles of employers doing everything they can to avoid true salary cuts to avoid morale drops holds in this recession. I don't, however, have an alternate hypothesis for the data. I'd like to get the raw numbers and plug them into some different style charts and see what they look like.
I dunno about general recessions vs. this recession, but that graph doesn't show many wage cuts.
Their ultimate conclusion is that we need some inflation because that businesses need to drop wages but are afraid to do that, and with inflation they could drop real wages without actual dollar salary cuts. I think I'd like to see some more data that shows that employers are afraid to cut wages, as well as deconvoluting out the choices to fire people as an alternative to wage cuts.
Ah, OK, one trap I believe they fall into is how they calculate this for hourly workers. They only measure the hourly wage, but for hourly workers most companies cut their wages by cutting their hours, not their per hour rates. So that is one inaccuracy (I only remembered to look for that because several papers have been called out for that mistake.)
Hour cuts would be consistent with it.
Sure, but that's because you're stating a different thing. Hour cuts don't have the same macro effect as wage cuts.
Company I left, our hourly people took a 10% wage cut via a cut in hours. That was restored very recently.
Our salaried people took a 10% cut by a cut in their salary of 10%. That was restored recently.
Both had 10% less income over that period. I'm not sure I follow what you are looking at as the difference.
There's not much difference to the workers, but there's a difference to the labor market clearing.
Assuming each hour of work results in X marginal widgets at the factory or whatever, cutting hours reduces the overall volume of production - less widgets - while cutting wages reduces the per-widget cost - cheaper widgets.
Econolib is a libertarian front group, but their New Keynesian overview by Mankiw isn't bad on this.
Along that line, it would be interesting to see the data on the "per widget" costs across various industries, as production has dropped so much. I.e. have wages being frozen and dropped been matched up to the lower production rates and thus actual costs per item, or have the costs per item gone up on average due to lowered production (due to lower demands) not being offset by the lower wage budgets?
A disappointing March employment report. +120k jobs. This comes after a run of 200k+ months so it's a bit of a letdown. Building Construction shed 10k jobs, retail shed 38k. On the other hand, austerity is no longer killing us (gov't only shed 1k jobs) and the February numbers were revised upward by 20k. Upward revisions have been the trend lately, so we can hope that the March numbers will improve.
Still, it's not a great report. Let's just hope it's a speedbump, and not a sign of a developing trend.
The whole economic growth vs. unemployment numbers is currently a big mystery. From a theoretical standpoint there hasn't been nearly the GDP growth that you'd typically associate with the past several months labor-market recovery, and yet here we are.
One other bit of good news I forgot to mention: hourly wages are up a bit.
Couple of interesting articles posted today about long-term unemployment.
Krugman - The Jobless Trap
McArdle - America's Jobless CrisisFive years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found.
It goes without saying that the explosion of long-term unemployment is a tragedy for the unemployed themselves. But it may also be a broader economic disaster.
So we are indeed creating a permanent class of jobless Americans.
Of course, there's difference of opinion in how to fix it. Krugman says stimulus, McArdle says private sector incentives for hiring/retraining. I lean toward Krugman, but either would be a whole lot better than what's coming out of Washington these days.You know why unemployment is under 8% today? Because a whole bunch of people have just given up and dropped out of the labor force. They've decided that it's no use looking because no one will hire them.
But is this because employers are discriminating, or because they're somehow different from those who have only been out of work a short time? Economist Rand Gayad decided to do a test. He sent out 4800 fictitious resumes, which differed by length of unemployment, experience, and number of times they'd switched jobs. What he found was that the long-term unemployed were less likely to get called for an interview than people with less experience, but a shorter duration of unemployment.
The economics journalist in me is pleased with the elegance of the experiment. The human being in me is dismayed at the humanitarian disaster underway in our labor markets. No, I'm serious. Short of death or a debilitating terminal disease, long-term unemployment is about the worst thing that can happen to you in the modern world. It's economically awful, socially terrible, and a horrifying blow to your self-esteem and happiness. It cuts you off from the mass of your peers and puts stress on your family, making it likely that further awful things, like divorce or suicide, will be in your near future. When millions and millions of people are stuck in this debilitating trap, we should be sounding forth the alarm.
Why choose between the two. Both together would be marvelous. And certainly will never happen under the current Congress :(
Ergo in my incredibly snarky and dismissive way, we're not living in the post-industrial utopia we thought. Human labor still remains the primary cost and driver of economic growth.
...and of course, some really important research recently has shown that if debt passes a critical threshold, then it has a devastating impact on growth.
Just to put things in perspective, Spanish unemployment was announced today at 27%; same as Greece.