How Sticky are Wages?

David Leonhardt on deflation, Wednesday:

The drop in prices, which isn’t over yet, will make life easier on millions of people. It’s possible, in fact, that the current recession will do less harm to the typical family’s income than it does to many other parts of the economy.

The reason is something called the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers’ pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

Fedex press release, Thursday:

FedEx is now implementing a number of additional cost reduction initiatives to mitigate the effects of deteriorating business conditions, including:

Base salary decreases, effective January 1, 2009:

* 20% reduction for FedEx Corp. CEO Frederick W. Smith

* 7.5%-10.0% reduction for other senior FedEx executives

* 5.0% reduction for remaining U.S. salaried exempt personnel

Fedex is largely non-union, which means that most workers are taking a pay cut. I’m not sure this is necessarily a bad thing, if it avoids layoffs and reductions in service quality, instead spreading the pain around more thinly. But it does point to the possibility that this recession will indeed be different, and that it might mark the beginning of the end of sticky wages.

There’s been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts.

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