Wednesday, February 25, 2009

Lo, they are always with you...

I refer, of course, to the poor and unemployed.While the Bible does not actually mention "unemployed", it appears that admonition could be the singular characteristic of the recovery from this depression.  Call it the curse of productivity.
Yet amid this carnage there is one thing that, surprisingly, has continued to grow: the paycheck of the average worker. Companies are slashing payrolls: 3.6 million people have lost their jobs since the recession started, with half of those getting laid off in just the past three months. Yet average hourly wages jumped almost four per cent in the past year. It’s harder and harder to find and keep a job, but if you’ve got one you may well be making more than you did twelve months ago.
This combination of rising unemployment and higher wages seems improbable. But, as it turns out, it’s what history would lead us to expect. Even during the early years of the Great Depression, manufacturing workers actually saw their real wages rise, and wage cuts have been scarce in every recession since. Oil and wheat prices may rise and fall instantaneously to reflect supply and demand, but wages are “sticky”: even when the economy goes bad, it takes a lot to make them fall.
It’s not because businesses are generous that wages are sticky; it’s because employers are worried. In part, bosses are afraid of what economists call “adverse selection”: if they cut wages, it’s the least productive workers who would be the most likely to stay, while the best workers would start looking elsewhere. (Even in a weak economy, businesses still compete for talent.) In a 1997 study of almost two hundred employers, the economists Carl Campbell and Kunal Kamlani found that the threat of losing their best employees was a major reason that bosses didn’t cut wages.
Even more important is the impact of wage cuts on morale. After the 1990-91 recession, the economist Truman Bewley interviewed managers and labor officials at more than two hundred companies and found that most believed that wage cuts wreck employee morale and eat away at productivity. Whatever money they’d save by cutting wages, bosses assume, would be cancelled out by the decline in effort and the breakdown of trust that wage cuts would create. Not everyone believes this: in the past month, both Hewlett-Packard and FedEx have announced plans for pay cuts. But generally, when sales and profits drop, wages aren’t cut, even in firms undergoing layoffs. Of course, layoffs don’t exactly help morale, but, as one of the bosses that Bewley interviewed coldly put it, they “get the misery out the door.” Cutting wages keeps the misery around. [More of a great, but sombre outlook]
My read on this phenomenon is very bad news for rural areas distant from service sector, high-skill jobs. What will be left in manufacturing are extremely technical jobs or pure entry-level labor, I imagine. Worse still, the ladders connecting these two levels will be few and far between.

There is considerable political cost as well. Unemployment benefits will be needed to cover more folks for longer periods than we suspect. Considering how few jobs were created in the last expansion, it is hard to see unemployment numbers bouncing much at all.  Compounding this is the effect of desperate business managers trying everything to lower costs by decreasing headcounts with technology.  Critics of policy will be able to point to high unemployment numbers long after GDP has started to rise. We could even see a resetting of the lower bounds of accepted unemployment.

One thing that could help is the seemingly inexorable march (slide?) toward severing health insurance from employment.  Even those currently covered will likely face cutbacks in employer contributions, and too many will see such benefits phased out.  If insurance were transportable and separate from employment, employers might look differently on re-hiring laid off workers.

Not do I think agriculture will be immune from this aspect of the recession. As our productivity skyrockets, higher commodity prices are unlikely to raise farmer numbers, except in the agrarian sector.

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