Wage Deflation

Photo Source: NJ.com (AP/Mike Drerer)

Yesterday, Newark Mayor Corey Booker announced furloughs and pay cuts for the city's employees, joining a significant, and unusual, trend which has taken shape over recent months...

In December, a 'blip' on our macroeconomic radar (Fedex' pay cuts for 36,000 workers) caused us to ask: What Shape is Your Supply Curve?

That 'blip', which has now become a siren, is something which the US has not seen for decades. In addition to layoffs and plant closings, which accompany any recession, the new and unusual feature of this downturn are the wage reductions for those who still have a job.

These are taking the form of either outright wage cuts, or mandatory unpaid leave. [One unpaid furlough day per month is equivalent a 4.6% pay cut, as 1 day / ((52 weeks * 5 days) / 12 months) = 4.6%.].

Since our December warning, anecdotal evidence of downward pressure on wages has been accumulating. Consider this sampling, taken from headlines during this period:
(click the links for the original articles)

Dec-08
Fedex: -5% for 36,000 employees (and more announced March 2009)
Agilent Technologies: -10% for 20,000 employees
Atlas Van Lines: -5%, 373 employees
AK Steel Holdings: -5%, 1500 employees
Hutchinson Technology: -5%, 4500 employees
Micron Technologies: -5% for 22,000 employees

Jan-09
Caterpillar: -5% to 15% for 25,000 employees
Gymboree: -10% to 15%, 4700 employees
Advanced Micro-Devices: -5% to 20%, 11,000 employees
YRC Worldwide (Trucking): -10% wage cuts for 50,000+ employees
Kulicke & Soffa Industries, PA: -10% to 20% for 2400 employees
Kemet Corp, NC: -10% wage cuts for 450 employees
MBH Architects: -25% to 50% cuts for 60 architects
City of Detroit: -10% proposed wage cuts for 15,000 city employees
Microchip, AZ: -10% (20% for executives), 4800 employees

Feb-09
Microsoft: -10% rate cuts for 40,000 contracted temps
HP: -5% worldwide wage cut affecting 112,000 employees
Conway Trucking: -5% pay cut (10% for managers), 26,000 employees
Modanock Hospital, NH: 2.5% to 5% wage cuts, 200 employees
General Motors: -3% to 10% pay cuts for 26,000 employees
Wynn Resorts: -10% to 15% cuts for 9,500 employees
Galveston TX: -3% across-the-board cuts, 700 workers
State of California: -9% cuts through 2 day/month furloughs, 200,000 workers
Columbus Components Group: -5% wage cut, 400 employees
Acco Brands: -10% (6 weeks at -47%, 12 wks at -20%), 2000 employees
American Axle: -10% cut for 17 executives

Mar-09
New York Times: -9% through 5% wage cuts & 2 week furloughs, 2000 employees
Indianapolis Star (Gannet): -15% wage cut affecting 200 employees
Oregonian Newspaper: -5% to 10% wage cuts, 1200 employees
Morris Communications: -5% to 15% wage cuts, 6000 employees
Anchorage Daily News: -2.5% to 10% cuts, 200 employees
Sacramento Bee: -3% to 5% pay cuts, 200 employees
Atlanta Symphony Orchestra: -5% to 7% cuts, ~100 employees
University of Iowa Hospital: -5% pay cut for 40 managers
Visit Florida (FL Tourism Bureau): -2% through 5 furlough days, 115 employees
Vail Resorts: -2.5% to 10% pay cuts, 3500 employees
American Reprographics: -5% wage cut, 4500 employees
Charlotte NC Fire Department: -3% cut in two stages, 239 firefighters
Fort-Worth Star Telegram: -2.5% to 10% cut, 1000 employees
Pittsburgh Glass Works: -3% to 15% cuts, 305 employees
Cleveland Orchestra: -5% to 25% pay cuts, ~110 employees
Orlando Orange County Expressway: -5% to 10% cuts, proposed, 50 employees
Dewey & LeBoeuf: ~80% reduction for 66 law partners
Burton Snowboards, VT: 0% to 15% pay cuts, 663 employees
Grill Concepts, Walnut Creek, CA: -10% cuts for 12 senior executives
Global Lingust Solutions: -40% pay cuts for 2,000 military-contract Arab translators
Lincoln Paper & Tissue, ME: -15% pay cuts or 1-day/wk furloughs, 350 employees
State of Minnesota: -8% through 1 month furlough/yr (proposed), 30,000 employees
State of State of Pennsylvania: -9% through 2 furlough days/mo. (proposed), 78,000 employees
Principal Financial Group: -2% to 10% pay cuts, 16,000 employees
City of Newark, NJ: -4.6% to 6.6% through 1 furlough day/month, 2000 employees


How unusual is this trend? Investopedia's definition of sticky-down notes that "attempting to reduce wages is something that has historically been so unsuccessful that it is almost never attempted anymore".

Last Friday's BEA release of Personal Income and Outlays for Feb 2009 provides data which confirm early warning signals of wage deflation.

Nominal, seasonally-adjusted private-sector wages declined by 0.4% from the previous month, continuing a six-month pattern of zero or negative growth.



As the US piles on Keynesian fiscal and monetary stimulus, it is critical to keep in mind that the Keynesian model absolutely depends on downward wage stickiness.

If wages are not 'sticky-down', the Keynesian model, with its supply curve derived from this assumption, falls apart. The classic, positively-sloped supply curve is what gives Keynesian stimulus its power. By increasing "G" (Government Spending) or "M" (Money Supply), Output (GDP) can be increased, with some trade-off for inflation. If wages are downward-flexible (wages fall by as much or more than prices), the supply-curve is vertical, and stimulus has no effect on output:



We noted last week that Keynesianism is Tired... with several conditions particular to today's crisis likely to render the traditional Keynesian levers ineffective.

At a much more fundamental level, anecdotal evidence as well as emerging data raise serious questions regarding the applicability of the Keynesian model to today's circumstances.


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