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Sticky Wages and Long-Term Unemployment
This article originally appeared in The Daily Capitalist.
There was an interesting article in the Wall Street Journal Tuesday by Sudeep Reddy on long-term unemployment that I thought did a good job of painting a picture of what happens during the bust phase of a business cycle. The article, "Downturn's Ugly Trademark: Steep, Lasting Drop in Wages" deals with the problem of long-term structural unemployment, something I discussed in last week's article, "What The Job Reports Mean." My point was that there is insufficient "real" capital available for new growth, and thus unemployment is likely to remain high.
The stories related in the article about folks trying to find employment are both dismaying and, for some who found jobs, inspiring. In a sad note, "Research shows that children of workers who lose jobs and go back to work at lower wages appear to suffer from lower wages, too."
Here are several excerpts from the Journal article:
But the decline in their fortunes points to a signature outcome of the long downturn in the labor market. Even at times of high unemployment in the past, wages have been very slow to fall; economists describe them as "sticky." To an extent rarely seen in recessions since the Great Depression, wages for a swath of the labor force this time have taken a sharp and swift fall. ...
The only other downturn since the Depression to see similarly large wage cuts was the 1981-82 recession. But the latest downturn is already eclipsing that one. Unemployment has stood above 9% for 20 straight months—longer than the early 1980s stretch—and is likely to remain above that level for most of 2011, putting downward pressure on wages. ...
Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.
More than eight million Americans lost their jobs during the recent recession. Many are returning to the workforce--but in jobs that pay them far less than they used to earn. WSJ's Jason Bellini reports.
The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. "The deeper the recession, the lower the wage you're going to get in the next job and the lower the quality of your next job," he says.
While difficult for individual workers, lower wages can make U.S. industries and companies overall more competitive and allow employers to hire more workers than they would otherwise. In the long run, that may make the nation more prosperous.
The article mirrors a lot of the same things I discussed. But what I found interesting is the comment on "sticky wages." This is contra to Keynesian thought in the sense that one rationale for government fiscal stimulus is that because wages take so long to decline, resulting in high unemployment, the government needs to step in and assist the unemployed and spend to get the economy going again. On the other hand, if wages declined quickly to realistic market wages, more employers would be likely to hire again at lower wages and thus fiscal stimulus would not be necessary.
Another reason for long-term unemployment was discussed in the article and that is that the unemployed may lack the skills that employers need as the economy emerges in perhaps new directions. Certainly many in industries related to the housing market and housing finance are finding this so. This is the unfortunate consequence of Fed induced boom-bust cycles.
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I don't know where you got the idea that "Keynesian thought" asserts that "one rationale for government fiscal stimulus is that because wages take so long to decline, resulting in high unemployment, the government needs to step in and assist the unemployed and spend to get the economy going again," except perhaps from the currently popular sport of blaming "Keynesian thought" for everything from bad breath to climate change.
That statement doesn't make sense historically, rationally, or empirically.
Keynes promulgated his theory during the Great Depression, the textbook deflationary depression. There was no problem with high wages, or sticky wages. The problem was continuing generalized deflationary conditions. Prices fell across the board, and this included the price of labor. Wages were whatever employers wanted them to be in the 30s.
There was no minimum wage, no unemployment insurance, and no food stamps. If you didn't work you were reliant on charity. If that wasn't available, you starved. There were plenty of people quite willing to work for whatever was offered, even if was just food.
There was no problem with wages not declining to "realistic market wages," quite the contrary, the problem was that wages declined so much that people were unable to afford many commodities. Thus the stories of crops being burned in the field because they couldn't be sold, and milk being poured out on the ground because it couldn't be sold at a high enough price to justify it's cost.
That's how we ended up with the system of agricultural subsidies that we have today.
The idea of 'sticky wages' preventing wages from adjusting down to "realistic market wages" would have been beyond Keynes' ability to imagine in the conditions of the 1930s, so your assertion that this is "Keynesian thought" is absurd.
The article you quote notes that this is the first recession since the 1980s and the Great Depression NOT to exhibit 'sticky wages'. Quite the opposite, wages have declined in this recession like the two cited.
The idea that sticky wages are responsible for prolonging unemployment by not adjusting downward to "realistic market wages" assumes that the unemployed are perfect substitutes for those who remain employed, and that they would take the jobs that the employed hold at lower wages if those currently employed refused to work at lower wages. I think that's self evidently false.
What exactly is the point you were trying to make? As best I can determine it is that somehow intransigent employed workers are causing, or have caused unemployment to persist in the past. There's not the slightest evidence to suggest this.
I don't know about climate change but Keynes did have bad breath.
In short you are getting long term unemployment because...wait for it...YOU ARE PAYING FOR LONG TERM UNEMPLOYMENT. A double muckup.
From here
http://cep.lse.ac.uk/pubs/download/occasional/OP015.pdf
The rationale for welfare-to-work is simple. If you pay people to be inactive, there will be more inactivity. So you should pay them instead for being active – for either working or training to improve their employability. The evidence for the first proposition is everywhere around us. For example, Europe has a notorious unemployment problem. But if you break down unemployment into shortterm (under a year) and long-term, you find that short-term unemployment is almost the same in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4% who have been out of work for over a year, compared with almost none in the United States. The most obvious explanation for this is that in the U.S. unemployment benefits run out after 6 months, while in most of Europe they continue for many years or indefinitely.
And somewhere MORE money is going to people who are even LESS productive: banksters!
Sticky wages are exactly why Bernanke must print.
You simply cannot get anyone to accept a wage cut. No one.
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR200901...
Most Union City employees accept pay cut http://www.ibabuzz.com/tricitybeat/2010/08/25/most-union-city-employees-...
Wolf Appliance Workers Re-Vote, Accept Pay Cuthttp://www.channel3000.com/money/24959088/detail.html
Cowlitz 2 firefighters accept pay cut to avoid furloughshttp://tdn.com/news/local/article_bec0e8ea-d271-11df-85c6-001cc4c002e0.html
Exceptions do not disprove the rule. Of the rest of the working population, almost none took pay cuts.
Besides all the cited exceptions of pay cuts took time to implement. With inflation, the pay cuts are instantaneous, and constant. Those that took pay cuts will not accept another pay cut for years. Contrast that with inflation.
And why the fuck should we accept more cuts when our leaders, corporate and government alike, simply use the opportunity to take more for themselves?
1991 - BUSH 1 - "job retraining" propoganda coming out of Wall St. & Washington ! Everybody has to "job retrain" ........ I did that !
1995 - CLINTON - "update your job skills or go back to school & learn new skills" ! ....... I did that, too !!!
2000 - BUSH - "job retrain for the new jobs coming" !! ........... I did that !! I'VE JOB "RETRAINED" NOW at least 3 times in the past 20 years & .......... & ...............
CONGRATULATE ME !!! ........ I'm now a 4:30 a.m. PANERA BAKER making $8.50 /hour & can barely afford gasoline to even get to work !!
thanks alot for the great policy, Washington & Wall St. ! ..... & to think I went to college for this !!
This is the longest recession since before 1948 and it will probably not end until 2014. I saw almost election night 2008 - people and small and medium business stop spending and fire people. My neighbors with money and business stopped spending. They spent more on home maint then many make per year. No more. Small to medium sized businesses I know started layoffs the day after the election.
Until Hu**ein-Mugabe 2 leaves office - nothing will improve. Bank on it.
If you think who's president makes any difference... good luck with that.
If voting really changed anything it would be illegal.
Couldn't agree more. Its funny, all these people post here act so "enlightened." If that were the case, one would see through the Right/Left paradigm. Neither "party" has ANY thing in common with us.
Bank on it.
Yeah but the Asiago is really good...
;)
Concurrently, corporations hold gargantuan amounts of cash, and we have the Gates/Buffett ersatz charity show. Wake the f*** up USA.
Are we heading for long-term structural unemployment?
Yes, for all the reasons you highlight and more.
BTW Econophile: Apropos your last post...here’s a good comment (with link to a previous on same) concerning the futility of spinning a narrative from crazy people's reading lists, especially the one of current prominence.
I went to the mall with my wife last weekend:
1. stores were empty;
2. the stragglers who were there were buyiong ONLY items reduced 60-80%; and
3. alomst no one was using a credit card. Out of the handfull of people who did several had their cards turned down by the card company.
Now, with cotton soaring 80% last year, food, oil, transport costs......I don't see much progress this year except from the Super Rich for Luxury items at Tiffany's, Mercedes, Yacht Club, etc where they can unload some of that cool $1,000,000 Bonus from The Bernank.
With the price of cotton soaring 80%, soon the Fed won't even be able to afford the fancy paper the use to print way too much money. This could be the end!!!
Given global wage arbitrage, I do not find this surprising at all. The value of labour is dropping because the labour pool has become global in scope, resulting in increased competition, so wages must drop in the developed countries if they are to become competitive again. At the same time, we will likely see wages rise in the developing countries as inflation kicks in, so an equilibrium will eventually develop -- it just means a period of painful adjustment in the mean time.
Of course, this also means the average standard of living in developed countries must drop as well, but that too will reach an equilibrium with the rest of the world.
The financial crisis has simply accelerated this process.
You make it sound as though the the median will hold: just a shifting occurs. With population increasing and the ACTUAL materials that go into creating wealth decreasing, I find it a lot easier to argue that the median will decline, which means that wages in "developing" countries won't be rising as much as people might think, and wages in "developed" countries might drop a lot further than people think.
if you include the people who were left no choice but to try and open up their own businesses and think they are "employed", i would say we are at 33%+ unemployment
Yes, and some of those new businesses may very well end up succeeding, and perhaps this is one of the few hopeful signs out there right now that there can be a recovery at some point in the future from this malaise. Good luck to all of those new small business owners! Looking back, this recession may be the best thing that happened to some people who were 'forced' into leaving a life of wage-slavery.
There will be NO RECOVERY!
A departure from wage-slavery would be good, but what would people then find themselves doing? Going from a structured system to a non-structured one will still require that you work for someone- you can be your own boss, but you're still working for people, and what they will be able to pay may approximate slave wages.
Bob Dylan's "Gotta Serve Somebody" keeps coming to mind...
Millions of construction workers in Florida, Nevada, etc are unemployed. There are just so many jobs that their skills would warrant even at lower wages at Home Depot or as a handyman for a condo ass'n. True structural unemployment in spades.
If and when the jobs return, and that is a very big if, they will be too old. With this group alone we have formed a permanent unemployed class.
Food, Shelter and Water. I figured that there was an over-saturation in the Shelter department, and Water needs very little personnel, so, I went with Food. If all goes bad I can at least eat my product...
"Unemployment has stood above 9% for 20 straight months"
if you use the same methodology that was used to calculate unemployment in the 1980's, we are at about 22% unemployment
see John Williams' numbers at shadowstats.com - he computes economic numbers without all the massaging that our govt uses
If a bum steer was as well massaged as the fed financial figures, it would be more tender than Kobe beef.
They don't massage the numbers, so much as they slip them a roofinal, rape them and then dump them in an alley.
"They don't massage the numbers"
if you torture the numbers long enough they'll say anything you want ...
Enhanced manipulation?
I read that story too and I took from it that a lot of folks think they are worth more then they really are. Two, it is a global market and US workers are competing at a global wage rate, we know what that means. Three, I'd would think twice before accepting those annoying annual cola raises and supposed merit raises if I am not bringing increased value to my employer. That to me his how a 50 year old employee eventually gets a ticket out the door after 25 years. Sad but true. Lastly, not to dump on the unemployed, we've all been there, but a lot of employers used this opportunity to get rid of underperformers.
"it is a global market and US workers are competing at a global wage rate"
some people think that capitalism in its current form is just an ongoing exploitation of the lowest cost labor - if a job can be done cheaper in China or Malaysia or Vietnam then that job will head there
this can be good if you are in the country receiving the jobs because new jobs can raise the standard of living - if you are in the country losing jobs, well, you're out of luck
the ultimate result of this process is that we reach the lowest common denominator (LCD) for labor cost at a global level - there is nowhere else to export jobs to so they stay in place
unfortunately for those of us in the US, the LCD is way below what we are used to which means a significant lowering of the standard of living here in the States
This has been in the works for decades, they are trying there best to bring us in for a smooth landing, but we are definitely hitting some turbulence in the next few years.
Fast wage drops are a sign of economic flexibility. Look for a repeat of the nineties tech mania. Buy qqqq!
it is profound that you note the lack of capital as the cause for what i term permanent high unemployment - that is a structural issue....antal fekete and jim willie have addressed this issue from different angles, but the quick summary is that the wage fund is depleted in part due to zirp and in part due to currency debasement brought on by vast criminal conspiracy in the bond market. the gold standard must return, vast liquidation of bad investments must proceed, and honest men must return to positions of influence and leadership - every single one of those requirements is lacking - and so shall unemployment continue and worsen. it is 25%.
to all of the fucktards who think that stupidity lay at the root of our problems: fuck you and your stupidity.
Considering how many people are already long-term unemployed, I'd say we're not heading for long-term unemployment. We're there.
Let's just remember that, as far as investing, equity markets are currently to a large extent disengaged from the greater economy. The questions are, of course, how long that can last and how quickly one can get out if and when a crash comes.
finite planet, with finite resources and population growth that outpaces technology with some technology replacing labor itself (making more people unable to feed themselves). Time for an entirely new economic model people.
or a massive plague of course. Sorry, wall street may be parasitic, but the host still lives (barely).
Anyone think about relocating to one of the safest locations in the world, Western Canada?
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/what-will-happen-to-canadas-western.html
I spent a fair amount of time contemplating it, but determined that it's got massive structural problems like everyone else. It may appear to be wealthy, but it's an illusion. As the Chinese will find out, it's hard to export when there are no customers (or the customers are unable to pay as much).
The CAD/USD matchup is something that I've been watching for some time. I think it tells a lot. The CAD is now stronger than the USD. Strengthening CAD, especially against its biggest customer's currency (USD), places downward pressure on exports.
Canada won't really be growing its export markets (nobody really will). It's a lot like the US in that it can't really compete manufacturing-wise with the rest of the world. That said, the upside to Canada is that, as you note, it has a fair amount of physical resources and a small population.
My layman's view of Western Canada's economic future is that it will suffer the same housing downturn that has hit many other countries (esp. the US). The growth-momentum is now gone since the end of the Olympics (a joke). Much of the housing market is propped up by foreign nationals, especially students, with Chinese making up what seems to be a substantial portion of this. What do you think will happen when China's economy stalls out and lots of those students get pulled back home (because their support money dried up)? I think that it's possible that the economic collapse could be rather large there.
The pace of business has quickened and it is very tough for people to adapt as quickly, thus lots more displacement.
Secondly, credit is absent for small and medium size businesses which drive employment. I don't see that changing much.
The more government regulation there is, the stickier things get for businesses to adapt quickly, thus they take on less risk and become more conservative.
Unions make market slowdowns near impossible to navigate.
All the trillions going to bail out wall street is not getting to the real economy. Inflation will not come from fractional lending on a recovery, but rather currency debasement causing flows into hard assets, higher regulatory environment driving up costs, poor energy policies by fed gov driving up energy prices for everyone.
Welcome to hope and change in your pocket.