Falling wage rates: Should we be concerned?

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.

  • http://pc.blogspot.com Peter Cresswell

    “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.”

    Well said. Glad someone’s saying it.

    And if stimulunacy wasn’t keeping up prices real wages might even be allowed to rise, even if money wages don’t. And if stimulunacy wasn’t propping up bad positions, we might have a chance at a real recovery.

  • http://www.psmbrokerage.com Richard Stone

    “As a result, the fact that wage rates have been able to move downwards is a good thing” – I agree with you on this. People may not be making as much as they used to, but at least they are still making something. Once the full recovery is underway, wages will return to normal and begin growing again (I hope).

  • Grant

    If wages for the same job are falling doesn’t that mean that productivity is increasing? Don’t we need to increase productivity to raise our standing in the OECD?

  • http://armadaindonesia.com elang

    reduced wages, may be better able to defend the company to continue to teach employees, so the economy will remain stable and worked well, for it in the workers’ awareness demanded to stay

  • http://www.nicesneaker.net leo

    reduced wages,we must be concerned!