Wage Deflation: Is The Government Missing The Numbers?

I was at a small family gathering last night (don’t worry, I’m not going to bore you with tales of the newest baby in the family) and virtually every adult there had just experienced a forced reduction in income.

A school teacher/counselor is having her salary cut 6.5% and class size increased by 50%. An employee of the California university system has had furloughs imposed that will reduce her income by around 10%. A partner in a large accounting firm said that everyone’s salary had been cut 15% — at leas they’re reducing the work week– and an associate in a large old-line law firm said that all associates and support staff had been hit with a 10% salary cut.

Remarkably or maybe not, the overall reaction was one more of resignation as opposed to anger. It is fairly described as thank God I still have some income.

What really struck me as I thought about this on the way home was the consistent reporting from the government that there are no signs of either wage or price deflation. That may be the case with respect to prices but I am seriously beginning to question the contention that there is no wage deflation. I suspect that the measures, such as the ones I outlined above, are becoming the norm and that the government’s apparatus for collecting data misses this point.

Unions have traditionally fought payroll adjustments that involve furloughs and across the board salary reductions, preferring to force companies to go the layoff route. Their logic which is valid is that once you accept salary rollbacks they are as likely as not to become permanent. If that’s a good interpretation then the current trend towards this type of employee cost control is going to have some fairly significant implications for growth when and if a recovery occurs.

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