Home > Uncategorized > Lowering wages is not the solution

Lowering wages is not the solution

from Lars Syll

In connection with being awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel a couple of years ago, Thomas Sargent, in an interview with Swedish Television, declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs.

This old mercantilist idea has very little support in research, since it has turned out to be exceedingly difficult to really get clear cut results of causality on the issue.

workers-wages-vsMany well-known and influential economists have for decades been writing out the same prescription — lower wages — for solving no matter what problem facing our economies.

As in the 1920s, more and more right-wing politicians — and economists — suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of the towering debts and create balance in the state budgets.

But, intimating that one could solve economic problems by impairing unemployment compensations and wage cuts, in dire times, should really be taken more as a sign of how low the confidence in our economic system has sunk. Wage cuts and lower unemployment compensation levels – of course – do not save neither competitiveness, nor jobs.

What is needed more than anything else in these times is stimulus and economic policies that increase effective demand. 

On a societal level wage cuts only increase the risk of more people getting unemployed. To think that that one can solve economic crisis in this way is a turning back to those faulty economic theories and policies that John Maynard Keynes conlusively showed to be wrong already in the 1930s. It was theories and policies that made millions of people all over the world unemployed.

It’s an atomistic fallacy to think that a policy of general wage cuts would strengthen the economy. On the contrary. The aggregate effects of wage cuts would, as shown by Keynes, be catastrophical. They would start a cumulative spiral of lower prices that would make the real debts of individuals and firms increase since the nominal debts wouldn’t be affected by the general price and wage decrease. In an economy that more and more has come to rest on increased debt and borrowing this would be the entrance-gate to a debt deflation crises with decreasing investments and higher unemployment. In short, it would make depression knock on the door.

The impending danger for today’s economies is that they won’t get consumption and investments going. Confidence and effective demand have to be reestablished. The problem of our economies is not on the supply side. Overwhelming evidence shows that the problem today is on the demand side. Demand is — to put it bluntly — simply not sufficient to keep the wheels of the economies turning. To suggest that the solution is lower wages and unemployment compensations is just to write out a prescription for even worse catastrophes.

  1. Scc
    April 9, 2017 at 7:50 pm

    Interesting that deflation is still so poorly understood.

    • patrick newman
      April 10, 2017 at 12:39 pm

      I may have misunderstood but are you implying that in a deflationary process it is not the absolute cut in wages that matter but the relative reduction of wages to reduction of prices that matters. It is the reaction of consumers to price deflation that needs consideration – deferring buying decisions in the hope of getting a better deal could induce a recession?

      • April 10, 2017 at 9:57 pm

        It is the reaction of consumers to price deflation that needs consideration – deferring buying decisions in the hope of getting a better deal could induce a recession?

        I suspect it is just the Reverse. Price deflation occurs as a response to consumers cutting back in response to the wage cuts they undergo. This leads to ever more price competition in markets they have cut back from, reducing prices in those markets and leading to rising bankruptcies [and lay-offs] in those sectors hardest hit by those cut-backs in consumer spending … ultimately, a deflationary depression.

        Monetary policy cannot resolve this problem.

  2. April 9, 2017 at 8:44 pm

    “This old mercantilist idea has very little support in research”

    Why are you calling this a mercantilist idea? It seems like it might in some sense be a colonial idea, but the point of colonialism is decidedly not economic growth for all. It is certainly not a mercantilist idea as mercantilism was practiced in England in the 1400s and 1500s and the US in the 1800s or South Korea and Japan in the 1900s.

    To the point of the central thrust of the argument. Another way of putting this is that neoliberals and supply-siders specifically, seem to be obsessed with the strange idea that paying someone half as much money to spend the same amount of time doing the same amount of work mysteriously increases efficiency somehow.

  3. Norman L. Roth
    April 9, 2017 at 8:45 pm

    April 09 2017

    Given how modern, organic, interactive, unavoidably open economies have evolved, it is not even possible to enforce solutions that would “control” employment levels, aggregate{effective} demand & incomes regardless of source. Not to mention ‘stimulating” such economies by any conceivable permutations, combinations & algorithms involving money supply, interest rates or just printing the damned paper and giving it away as “social programs” and “infrastructure/public investment.
    . The dilemma confronting us has been discussed many times in RWER. May I humbly suggest a return visit to:
    VOLUNTARY and INVOLUNTARY DECLINES in LABOUR SUPPLIED by Mme. Merjin Knibbe. Feb. 07 2014. Please scroll down to:{1} Feb. 08 2014 {2}Jan. 02, 2015, both by Norman L. Roth

    Please GOOGLE: Norman L. Roth {2}Norman L. Roth, economist {} Norman L. Roth, economics of work {4} Norman L. Roth,Technological Time

  4. April 9, 2017 at 10:55 pm

    The solution is recognizing that policies effecting individual and commercial monetary freedom and a free flowing general DISEQUILIBRIUM…are the only way out of all of the conundrums and paradoxes currently afflicting economic theory. wisdomicsblog.com

  5. Craig
    April 9, 2017 at 10:58 pm

    The solution is recognizing that policies effecting individual and commercial monetary freedom and a free flowing general DISEQUILIBRIUM…are the only way out of all of the conundrums and paradoxes currently afflicting economic theory. wisdomicsblog.com

  6. Grayce
    April 10, 2017 at 12:37 am

    Those who do not study Theory X and Theory Y are condemned to repeat their errors. No one-size-fits-all belief will save the time of getting to know individuals. Managing as herding may work in strict military regimes for all I know.

  7. April 10, 2017 at 1:02 am

    Nominal wage cuts lead to very rapid declines in both the range and composition of consumer goods among those affected by those wage cuts.

    Nor is it likely that the ’employment growth’ (if any) following from generalized wage cuts, would improve matters by expanding the range and composition of consumption. A 10% cut in wages will NOT be fully offset by a 10% rise in employment; and the changes in the range and composition of consumption expenditures by wage-earners will not be affected.

    Because one can expect to see less needed or higher quality goods cut-back from in consumption terms, leading to lay-offs, wage cuts cannot provide for long-term rises in employment.

  8. Craig
    April 10, 2017 at 1:16 am

    Scientists and even philosophers will puzzle over all of fragmentation and contradiction in economic theory until they discover the natural concept whose most basic aspect is a thorough integration of bothness/duality itself. Then, if they’re careful and they use the mental discipline of Wisdom even more than the beautiful, important and almost as complete disciplines mentioned above, they will be able to perceive the way out of the current morass, implement policies aligned with that natural concept and so bring us to a third, new and more unified understanding.

  9. April 10, 2017 at 4:14 am

    What is amazing, mind-boggling, flabbergasting — and many other purple adjectives — WHY does this NEED to be said, 80 years after publication of Keynes General Theory? What are the reasons for this regress in knowledge in economics?

    • Craig
      April 10, 2017 at 4:57 am

      IMO it’s because Keynes only identified and prescribed policies for the structural economic problem when an entirely new philosophical concept and monetary paradigm was necessary for economists to perceive. In other words Keynes did not go deep enough. This was true when Keynes wrote the general theory and is even more pressing now not only because Keynesianism got morphed into neo-liberalism by the false ideology of general equilibrium looking to be justified, but also because the real underlying problem of an inherent, systemic scarcity of demand in ratio to costs/prices has inexorably trammeled on for almost 80 years while the monopolistic financial paradigms of Debt, Loan and For Production Only have also not been countered and broken up by the new and necessary paradigm of direct and reciprocal monetary Gifting.

    • April 10, 2017 at 9:47 pm

      What is the reason?

      Clearly, it was the capture of what economics is by the Chicago School of Economics well-funded by those with an ideological agenda. The article Mr. Anonymous and the Not-So-Spontaneous Birth of the Libertarian Movement [See: http://www.scoop.co.nz/stories/HL0812/S00378.htm%5D. Where institutional and other economists like Keynes had made some headway in challenging the scientific basis of neo-Classical theory — especially utility and general equilibrium theory — the Chicago School reinstated methodological individualism wrapped up in ‘freedom to choose’, ignoring that many have no such ‘freedom’ while also ignoring human needs for subjective plus objective bio-psycho-social well-being.

      As I have said elsewhere, the common weal refers to the well-being of the public as a community of persons, as a society that is not merely not an aggregate of ‘market choice’ decisions given personal ‘endowed’ incomes and their distribution. It is about how communities provide opportunities for all of their members by working together to do so, thereby socially ‘maximizing’ the well-being of community as a whole. It is tethered to the well-being of everyone, not to the well-being of some with the ability to pay. Ability to pay has nothing to do with well-being. Neither does methodological selfishness.

  10. April 11, 2017 at 10:19 am

    Humans are socialized through imitation. Especially the young. Larrymotuz is correct when he says, “…the common weal refers to the well-being of the public as a community of persons.” But then he assumes that communities must support values and actions that aid the community. That runs counter to what we know of history and evolution. Communities and their offspring sometimes create values, action, and ways of life that glorify certain members of the community and promote the imitation of the actions and values of these members. Sometimes the values and actions thus spread through the community attack and denigrate the needs of the community and instead favor those of select community members. Community functioning is disrupted and the community’s welfare put at risk. Such problems are difficult to solve. Sometimes they are not resolved at all. This means each society or collective way of life must be assessed in terms of the balance that exists between community-building and community-destroying values and how this balance can be and is being changed.

    • robert locke
      April 11, 2017 at 5:37 pm

      The price of liberty is eternal vigilance.

      • April 11, 2017 at 8:10 pm

        Damned straight! But difficult to do in practice. I’ve worked in politics for 40 years. Most of the politicians I worked with unfortunately lost their souls in the efforts to stay in office and “be important.” That’s the uphill battle in making communities that genuinely serve the “commonwealth.”

    • April 12, 2017 at 3:39 pm

      But then he assumes that communities must support values and actions that aid the community.

      Actually, Ken, I assume that communities must support values and actions that enhance the potential for the betterment of the well-being and freedom from economic and other coercion of every person by providing public goods like education, health care, social infrastructure and the like that betters society as a whole.

      Yes, that is abstract. It is a goal, but as a goal, it is one achieved by some societies in far superior ways than what occurs when methodological individualism as the ‘good-for-me’ downplays or ignores the ‘good-for-us’ on which many a broader good-for-me … like the potential for realized self-determination … relies.

      A sense of what I am getting at can be found in the non-academic book The Nordic Theory of Everything: In Search of a Better Life by Anu Partanen

      • April 13, 2017 at 10:28 am

        Larrymoutz, the problem here is that what you call ‘methodological individualism” is also the result of people in community. It cannot be otherwise since all values, ways of life, moral codes are created within communities. Homo Sapiens have lived this way for over 70,000 years. It’s nice and comforting to think of communities as, as you say, enhancing the “…potential for the betterment of the well-being and freedom from economic and other coercion of every person by providing public goods like education, health care, social infrastructure and the like that betters society as a whole.” If that were so no civilizations would have declined or fallen. But historically communities move in different directions. Sometimes in self-destructive directions. And, evolution goes down blind paths sometimes and even successful evolution often moves by three steps forward, two steps back. But on balance the human imagination has more-often-than-not moved in the direction you suggest. Just don’t expect the trip to fast or smooth. It’s never been either. All the self-help, planning, and better life books and speakers can’t change this. Though I too like to believe humans can more times than not make their communities move in the directions you name.

      • April 13, 2017 at 3:14 pm

        Ah, I am using the broad term methododological individualism in a different way than you. In mainstream orthodoxy, ‘methodological individualism’ focuses entirely upon the subjective preferences of individuals and how these maximizing it for themselves and only themselves as consumers.

        This has the following faults:

        1. It ignores the reality that ‘rational’ behavior is geared not necessarily to realizing preferences first, but to realizing objective benefits related to an aim/goal/purpose. It does this by hypothesis — namely that every realized benefit is associated with pleasure/satisfaction. [That hypothesis has implicitly concealed or explicitly fudged over the distinction between being satisfied with a benefit and having an amount of benefit sufficient to bring satisfaction to a ‘consumer’. Though we would not say that a ‘firm’ buying inputs to production would be ‘satisfied’ if it could only obtain 1/10th of what it needs to produce to maintain break-even or profitable production; strangely/b>, the theory of the consumer, based upon subjective preferences, makes it impossible for any consumer less than maximally satisfied with what he/she/the family can realize in markets. I.e., if hundreds of thousands of persons were dying daily of starvation due to a lack of food while each of these can and do afford to buy, say, one grain of rice which, presumably, they ‘liked’ to have, mainstream theory would nevertheless conclude that every ‘rational’ such person dying of starvation would have maximized preferences, so the well-being of these consumers is at a maximum until they each drop dead. [Put differently, the theory assumes that consumers only consume what they like ALL OF THE TIME, never consuming what they dislike ANY OF THE TIME, and that the amounts of what they get to consume are immaterial to their welfare.

        2. The ‘methodological individualism’ of the mainstream theory of the consumer does not permit a community to be anything except an aggregate of individual consumers, each of whom is competing with other individuals all of the time. This means that, as mainstream economic theory has it, ‘welfare’ is simply the aggregate of well-being presumed to exist if individuals are ‘rational’ in their purchasing decisions — and theory defines them as ‘rational’ if and only if they consume what they subjectively prefer to all of the time. Thus communities and what they can or do provide are not part of the ‘endowment’ of individuals within those communities. [In my view, what communities do ‘endow’ is what consumers do not have to purchase in order to realize some measure of self-determination. What communities can endow, quite literally, is freedom from having to purchase in markets.]

        I could go on but this is already lengthy enough.

        Thanks, Ken.

      • April 14, 2017 at 8:13 am

        Larrymoutz, I think I can be more precise in my perspective. My sociologist colleagues use a phrase that summarizes what I’m trying to say. That phrase is “socially constructed.” I don’t use the phrase generally since I object to the way it’s explained by some sociologists. It leaves the impression that the social is a thing rather than a process. But laying that aside for now, what I’m talking about is social construction. All human (home Sapiens) ways of life (cultures) are socially constructed. That is, they are created and changed through interactions of humans with one another and with the nonhuman world. Yuval Harari says it this way in his book “Sapiens.” “…how did humans organize themselves in mass-cooperation networks, when they lacked the biological instincts necessary to sustain such networks? The short answer is that humans created imagined orders and devised scripts. These two inventions filled the gaps left by our biological inheritance.” I cut that down by simply saying, humans invented and invent themselves. And they do this inventing socially (in groups). And that’s been the case for at least 70,000 years. So, my use of the term community is meant to convey this. Some inventing creates communities of sociopaths that betray and murder one another. Other inventing creates communities in which each human and human interaction is respected and treated fairly and equally. Today, we are nearer to the former than the latter. But since humans create the rules and the scripts, this can be changed. But even if changed, some members of the new community will still be sociopaths, or worse. That’s just how evolution (biological and cultural) works.

  11. April 13, 2017 at 1:52 pm

    I’m unemployed. I got the supply, but there’s not much demand for me.
    Possibly to get a job, you have to do something called ‘look for a job’. I’ve looked around here but I dont see any—mostly all i see is piles of papers and books and musical instruments. Maybe its in the other room. Or maybe there is a different algorithm for where to look.
    I did see on my email a note that this area has 60,000 job openings.
    Also i get plenty of notices about career training—basically learning techniques for data analytics, web site design, computer languages, etc. There is a radio show called business matters—mostly about progressive ‘hospitality’ businesses—basically restaurants, bakeries, etc. geared towards liberal/radical types (lets say not exactly Trump supporters but more like the protestors—there’s going to be a big ‘earth day/climate/scientists march soon.)

    (Aside—
    Scientists are going because Trump is basically defunding climate science and cutting others, and also essentially deleting all government science research from government web sites. Scientists have been (frantically) trying to preserve back up ccopies on therir own web sites. Under Trump perhaps the past will be abolished, because people keep living in the past. Its time to live in the future. )

    Some of the progressive businesses now have free spaces in them, where people can do ‘intellectual’ work (eg on a laptop) , or study, or read, and drink free coffee.
    I think this is a sort of donation because this is a divided city—some people are doing very well either in progressive jobs, or with Trump , the military, or gentrification/real estate businesses, or young , educated and on somewhat low incomes, or flat out in poverty, , uneducated, with drug problems, criminal records, etc. (Those people in general aren’t welcome in the progressive places unless they are part of activist groups. They have to go to public libraries or fast food restaurants if they want to sit somewhere.)

    Half of what is made and sold around here seems quite good—and alot is made in china (eg camping and bike equipment, clothes…). In some places (like around here) much of everything used to be basically second rate junk—it would fall apart in a month. You’d have to go to the the suburbs to get anything of quality. The food was junk too. But now quality has trickled down, so one can get good food and stuff almost everywhere (esxcept a few neighborhoods —basically the ones with the high homicide rates–though we have that around here too a bit. There is all night police presence / surveillance in front of my building because of this issue. Although good stuff to buy and places to go are available not far away, sometimes you dont even want to go outside —go anywhere, buy what you need, look for a job, meet poeople , go to marches or events—especially if you know you are coming back after dark. Better get off the street fast; even if its not really common, something can happen anytime. )

    Half of what is made or things to do doesn’t interest me or I may even object to. This incudes ‘junk’ (including excess drugs and alcohol, junk food–marijuana is now essentially legal in my area, but it can’t be sold—instaead you buy ‘paraphilnalia and they give you weed as a a ‘gift’ ) and ‘luxury’. Alot of what is made is for the wealthy or those with good jobs (construction and maintenance, transit, schools…). Military and IT drive much of local economy–there is a large or huge security industry — regular police types and then the computer security/spy people .
    Alot of jobs are essentially catering to their tastes.
    Those jobs don’t appeal to me.

    Of course in this world you have to make stuff you can’t afford to buy, because then you can at least buy something, which may be good enough.
    Slaves worked on plantations for food and shelter. Chinese factory workers get something for making stuff for the usa. Immigrants around here do alot or most of the ‘dirty work’ and construction and maintenance.

    I would like a job (or get paid ) to study exactly what jobs are needed. One local univerrsity has a group that studies this, but its geared towards makin g sure there is no mismatch for this current economy—ie how many low paid people are needed, and how many high pay people–how many klawyers, political consultants, lobbyists, advertizers, PR people, etc.
    (All kinds of prostitution seem also pretty big around here but its hard to measure how big a part of local GDP is ‘underground’ and sort of off the books. (Some is totally off–either its barter or ‘sharing’, or people use bitcoins.)

    I’m not really qualified to judge much of this stuff, but I tend to think alot of the work done—including research and science, and art, education, polcymaking and law, is either unnecesary or wayn overpriced–its more of a bad habit than quality production. There is a diabetes, addiction, and obesity epidemic, so some things shouldnt be made, bought, or sold at least in current quantitites. (Some hope legal weed will get people off of buying more dangerous things which lead to huge health care and sometimes criminal justice costs as well. Most homicides around here are drug related.

    (its interesting that the doctor kicked of a United plane in a viral video –who has 4 kids who are also MDs–was busted for selling illegal opiates to his patients (one in exchange for gay sex)–sort of like having a second job, if you have a big family even if are an MD (but he was in kentucky, which is a poverty stricken place so MDs may not much there.

    .
    But society evolves via ‘the wisdom of crowds’. One has a huge population, and most people may not really produce much of value—-all the people commuting to work everyday leading to a huge transportation sector—or flying around the world, maybe should spend more time at home. Just do nothing or find something to do, rather than go somewhere and do a tiny little bit of something while pretending you are doing alot.

    One pretty much has to join in what may be a grand delusion. Run with the crowd.

    (I guess i could ‘write a book’ or do ‘freelance science writing–i actually do a tiny bit, and get in bitcoins (basically nothing, since i get pauid based on how many people ‘click’ on my online articles—which are almost a joke anyway. Writing like that has a place—they are basically ‘pop science’ rather than research level which is much harder to do and often beyond my competency. (econophysics, ecological economics, theoretical biology–i’ve talked to the few academics i know of locally who do this stuff but they tell me either they do this as a side thing for fun basically since its not what they really get paid for, or else they dont have jobs available unless maybe you are in your 20’s, pleasant, with no bad habits, maybe were top 10% of your class, agree to avoid any political topics that may incur the wrath of god, powers that be, corporations that fund you, etc. .

    I guess i think there’s already too many books, which are mostly redundant. (I see local authors not un commonly pusing their brilliant book which reports their discovery of global warming last year when they saw al Gore’s moovie, or income inequality when they bought but didnt read much of Piketty’s book–they didnt have time since they had to write their own book.)

    One can also blog for a living. If you are diligent and have a good product you can live off this–i hear posting pictures of cats is a pretty good blogging area. Some post scenery.

    I sometimes go on group hikes–alot of people spend much of the like enjoying the wonderful scenery and company as seen through their camera. Take the same picutre as everyone else. At least modern cameras dont require film, chemicals for developing it, paper, etc. But how many picture of cats and mountains do we need.

    But there is a demand for these—it gives people something to talk about if they they can’t use their imagination to find something else to talk about.

    Alot of work these days is designing computer apps—these are great–i can get bus schedule, the weather, topographic maps of my hiking areas, and so on with a few clicks.
    But i dont need or want the horoscopes, and whatever. But there is a demand for that.
    Supply creates its own demand, says say’s law.

    )

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