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 …).
December 19th, 2008 at 4:08 pm
Uh… I just called Wells Fargo and got a 4.75% mortgage today. Paid a point to get it. 30 year fixed. It replaces a 6% 5/1 ARM that I got a little over a year ago.
There is no trouble getting a mortgage if you have good credit and 20% down. As it should be.
December 19th, 2008 at 5:36 pm
My experiences comport with Buzzcut’s.
December 19th, 2008 at 7:53 pm
You all haven’t been on the entrepreneurial side of the equation. I also have great credit and the net worth to qualify for conforming loans, as do my partners in various ventures, but the last 14 months have been extremely difficult in the credit markets. T. Boone Pickens can’t get a loan to build his wind farms. Enough said. Anyone who is playing in the big leagues understands the issues.
We need to eliminate banks as the primary source of lending and have the Fed lend directly to entrepreneurs and collect the interest instead of privatizing the profits and socializing the risk under the current framework (prior to September anyway). The solution to lower wages is more opportunity for the talented to get to the other side of the table. Access to education is not enough. Citizens need access to capital from non-vultures to achieve to the level of their abilities and determination.
December 22nd, 2008 at 1:42 am
As one of the 39,000 salaried exempt employees of FedEx affected by the announcement of a 5% (for me) paycut, this doesn’t paint the entire picture. While I cannot argue that these types of measures may be needed for the long term health of the company, one needs to take into account the loss in “real” terms.
In addition to the 5% paycut I just received, the company will no longer contribute to my 401K account with a company match, in may case it’s 4%. Also the suspension of annual merit raises, in my case a 3.5% increase due in April 09. All added together that’s a 12.5% reduction of real cash for 2009 alone. Not to mention the loss of earnings in my 401K as a result.
To add, as an expat(I work overseas), the quarterly Goods and Services allowance that is part of the package for expats, offsets the difference of the cost of living between here and the US is based on my salary. Trust me when I say the price of good and services have not dropped 5% here.
According to the info published by FedEx, these salary paycuts will be permenant. Meaning that when the economy turns around,the company meets it’s target financials, and our merit raises resume, for example, they will be based on the new, lower salary. Our salaries will not “bounce back”. Bottom line, I figure it will be nearly 3 years before my salary returns to where it was before the paycuts and my career long earnings will never catch up. I’m not even considering how this will ultimately impact my retirement.
What alternatives do I have? I still consider myself lucky to be employed by a good company considering this economy but that still doesn’t make it easier to swallow.
The only thing “sticky” about my wages is the “Sticky Fingers” of all the people trying to get their hands on what’s left of it.