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PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recession

Porfirio Rubirosa

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The risks of cutting wages during this recession
May 5th, 2009
Obviously, the jobs situation in New Zealand is deteriorating. On current trends, unemployment is now expected to reach 8 per cent before this recession is over. Not surprisingly at such a time, the hoary old issue of whether you should take a wage cut to save your job is also back on the table. Most of the time, there is no choice involved. Wage cuts are usually presented to staff as an offer they can’t refuse. Still, in today’s New York Times, economist Paul Krugman takes a hard look at the paradox of such wage cuts when they happen at the same time throughout an economy. The result, he says, tends to be higher unemployment.

How come? Well, Krugman explains :

Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

What a fall in wages does is lessen demand - and remember this recession is characterized by the drying up of credit, spending declines and by attempts to pay off debt. All of which are exacerbated by falling wages. Krugman again :

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Over the course of time, the net effect of those falling wages can readily offset any gains from a decline in interest rates. Dr Bollard can cut interest rates all he likes, but the chances of productive investment reaping returns (in the domestic economy in particular) will remain slim, if falling wages cancel out any savings on the home mortgage, thus leaving the retail sector still spinning its wheels. (Which it is doing. Over the past year, Statistics NZ figures have shown a decline of almost 6,000 jobs in hotels, motels, cafes and restaurants as a result of fewer tourists and reduced domestic spending.) In such circumstances, the temptation for further wage cuts is strong, and is likely to feed the spiral of decline.

The cautionary example, as Krugman says, is Japan – where private sector wages fell by more than one per cent a year from 1997 to 2003. This wage deflation, he argues, made a significant contribution to economic stagnation. Is this kind of scenario likely to play out in New Zealand ? The deterioration in the labour market was evident in yesterday’s Statistics NZ survey - during the March quarter, the figures for jobs filled, hours worked and full time employees all fell during the first three months of 2009.

Even so, any labour cost advantages that might be expected to flow from this growing pool of available labour, as NBR has pointed out, is not yet being reflected in wage surveys, because of the underlying skills shortage. To date, employers have been gritting their teeth and still paying top dollars to attract and retain prized staff – which is probably why, amidst a year long recession, private sector wages actually rose by five per cent in yesterday’s survey. Clearly, this will not be sustainable as the recession continues – and tomorrow’s Labour Cost Index figures should give a more accurate and telling snapshot of just how much the wage window has recently closed, even for skilled workers. On Thursday, further survey figures will show how steeply unemployment has risen from the 4.7 % rate recorded in December.

Up until now, it seems plain that public sector jobs have been helping to save the day. The big job declines have occurred in manufacturing – 19,000 fewer jobs than a year ago, and in building and construction, which is down by almost 10,000. While such closures as Lane Walker Rudkin justifiably gain headlines, there have been, as the Dom-Post has reported, offsetting job increases in the health sector and in education. Which merely goes to underline that if the government does carry out sweeping job restructuring in the public sector, it risks knocking out one of the few props remaining for the domestic economy. The urge to cut costs and reduce debt on one hand are in genuine conflict with the pressing need to keep stimulating the economy.

For these reasons, the Greens home insulation plan is looking more and more like a godsend. Besides the scheme’s intrinsic health and energy benefits, the home insulation programme also bids to create jobs in one of the key employment areas – construction – that is most in need of stimulation. How deeply ironic. As the government’s own flimsy ideas – the national cycle way, the equity scheme with banks – wither away on the vine, it is the Greens who, in opposition, have ended up providing one of the most practical solutions for our ailing economy.
 

Porfirio Rubirosa

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Re: PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recess

Op-Ed Columnist
Falling Wage Syndrome
By PAUL KRUGMAN
Published: May 3, 2009
Wages are falling all across America.

Fred R. Conrad/The New York Times
Paul Krugman

Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.

Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.

First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.

It’s true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the Bureau of Labor Statistics, the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn’t be at all surprising if overall wages started falling later this year.

But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?

The answer lies in one of those paradoxes that plague our economy right now. We’re suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We’re suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.

And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.

Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.

Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.

So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilizing the economy isn’t enough: we need a real recovery.

There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year.

But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.

To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.
 

chinkangkor

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Re: PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recess

Our wages had already been depressed before the crisis and suffer further cuts during the recession. It's too late to save our food & beverage and retail sectors.
 

NissanViP

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Re: PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recess

Not going to happen for Singapore Government, they in fact even plan how to raise their salary without much kpkb from singaporean.

Well.. times will tell when LKY give the green light to UP Government Cabinet-lan cheow salaries the moment economy improve by at 1% or less.

Lets see......
 

Watchman

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Re: PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recess

Wage control is a kind of control machanism !

So workers will be locked in bondage to the system !

The common peasants holds shallow knowledge, perception and awareness of the workings of things .
 
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Porfirio Rubirosa

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Re: PAPee LHL & Ah Lim please take note:The risks of cutting wages during this recess

For along time we kept wages down because we wrongly believe that competitiveness is determined by cheap prices. We must allow wages to move so that they reward productivity, creativity, quality and innovation...

The dependence on low skilled and low cost foreign labour has been a major issue in efforts to upgrade the Malaysian economy, and this will be critical not addressed soon and effectively...We all know what should be done and in fact the government has stated its stand on the matter. Unfortunately, the solution lies with Malaysian businesses. Many are reluctant to change to technology-intensive, higher productivity activities because their focus is short-term costs and profits. So unless businesses think long term, this situation will prevail...But the government must also be firm in limiting the supply of these workers and showing their true costs.


Tun Daim ST 9/5 talking about m'sia's economy but i think his comments also applicable to s'pore's economy
 
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