Economists have long argued that wages are sticky. I think it was the late John Dunlop who first discovered this. He told me once that Keynes actually sent him a letter congratulating him on that. Fed Ex has just announced big wage cuts. Felix Salmon says it may be class warfare time.
There’s been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts.
Hmmm… cutting wages in a downturn when folks say there’s a need to stimulate demand and consumption. And double hmmmm… locked up credit markets where people can’t get loans. Try it for yourself, go out there and try to get yourself a mortgage on the buy-of-a-lifetime house. Boy oh boy, quite a vicious set of collective action problems we’re confronting. Not to worry: we have the stimulus and the auto bailout coming (ahem …).