Falling Wage Rates

In yesterday’s Wall Street Journal, there was an article titled “Returning Workers Face Steep Pay Cuts“The article cites research by Kenneth Couch of the University of Connecticut that returning workers are taking on average a 40% pay cut from their old jobs.  This is first and foremost a personal tragedy for those affected.  The question we must ask as economists is why?

Econometricians will still be picking over the data a decade from now. (And of course, they will be looking at revised data, rather than the data we are viewing today. But that is a subject for another post.)  One factor that must not be overlooked is that capital has been destroyed in the prior boom.  The so-called bust or crisis is the revelation of those losses.  Capital is heterogeneous.  The capital embodied in all those unoccupied homes in Las Vegas cannot be deployed to build goods and employ workers in the manufacturing sector.

Many analysts, myself included, argue that economic recovery will involve a switch to a lower consumption path.  In the process, proportionately more resources will be devoted to production of goods for rest of the world.  New savings will be needed to finance that transition.  But much accumulated savings have been lost due to capital misallocation. In order to be competitive in the global economy, the U.S. must become a country of lower wages. And we are witnessing that painful adjustment in real time.

The reflationists (whether monetary or fiscal) conflate cause and effect.  Falling wages rates are the consequence of prior bad policies and decisions.  They are not the cause of current problems.  Moreover, fiscal and monetary stimulus cannot restore the lost capital.  Printing money or redistributing income does not create real wealth.

Falling real wages and declining living standards put flesh on the skeleton of macroeconomic policy debates.  They are the real-world consequences of bad macroeconomic policy: easy money, politically directed investment and regulatory capture.  All those bad policies are being continued or enhanced.  Only further misery will flow from them.

Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!

About Gerald P. O'Driscoll 16 Articles

Affiliation: Cato Institute

Gerald O’Driscoll is a widely quoted expert on banking and monetary policy. Previously the director of the Center for International Trade and Economics at the Heritage Foundation, O’Driscoll was senior editor of the annual Index of Economic Freedom, co-published by Heritage and The Wall Street Journal. He has also served as vice president and director of policy analysis at Citigroup, and vice president and economic advisor at the Federal Reserve Bank of Dallas. He has also served as staff director of the Congressionally mandated Meltzer Commission on international financial institutions.

He is widely published widely in leading publications, including The Wall Street Journal. He has appeared on national radio and television, including Fox Business News, CNBC and Bloomberg. With a dozen years experience as a university professor, O’Driscoll speaks regularly at academic conferences and universities.

O’Driscoll holds a B.A. in Economics from Fordham University, and an M.A. and Ph.D. in economics from UCLA.

Visit: Jerry O’Driscoll's Page

Be the first to comment

Leave a Reply

Your email address will not be published.


*

This site uses Akismet to reduce spam. Learn how your comment data is processed.