According to the Employers and Manufacturers Association’s 22% of job types are being done for a lower wage in 2009 then they were in 2008. Furthermore, according to recent labour market data 1% of actual employees have received a pay cut in the past year.
At first this seems like a bad thing. Falling wages mean falling labour income. If other prices are unchanged such movement implies that people will be falling below the poverty line. Furthermore, it implies greater levels of government spending – as income rebates are negatively related to income.
However, the pain the economy is experiencing is because of the recent recession, and the large shock to activity New Zealand (and the rest of the world) has experienced. One of the reasons why we often urgently run to government stimulus during a recession is because wages and prices do not adjust to a change in the economic situation.
Specificially, nominal wages are said to be sticky. If the nominal wage is stuck and we have a recesssion (which reduces the demand for labour) then we end up with a “surplus of labour” – or unemployment. The less sticky wages are, the less unemployment the economy faces.
As a result, the fact that wage rates have been able to move downwards is a good thing – it suggests that the economy has been able to adjust and keep more people in work (and as a result, keep activity rolling at a higher level) then would have been the case if wage rates hadn’t been adjustable.