Wage Deflation: Is the Government Missing the Numbers?

I was at a small family gathering last night (don’t worry, I’m not going to bore you with tales of the newest baby in the family) and virtually every adult there had just experienced a forced reduction in income.

A school teacher/counselor is having her salary cut 6.5% and class size increased by 50%. An employee of the California university system has had furloughs imposed that will reduce her income by around 10%. A partner in a large accounting firm said that everyone’s salary had been cut 15% — at leas they’re reducing the work week– and an associate in a large old-line law firm said that all associates and support staff had been hit with a 10% salary cut.

Remarkably or maybe not, the overall reaction was one more of resignation as opposed to anger. It is fairly described as thank God I still have some income.

What really struck me as I thought about this on the way home was the consistent reporting from the government that there are no signs of either wage or price deflation. That may be the case with respect to prices but I am seriously beginning to question the contention that there is no wage deflation. I suspect that the measures, such as the ones I outlined above, are becoming the norm and that the government’s apparatus for collecting data misses this point.

Unions have traditionally fought payroll adjustments that involve furloughs and across the board salary reductions, preferring to force companies to go the layoff route. Their logic which is valid is that once you accept salary rollbacks they are as likely as not to become permanent. If that’s a good interpretation then the current trend towards this type of employee cost control is going to have some fairly significant implications for growth when and if a recovery occurs.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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