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Thursday, July 30, 2009

Sluggish Wages and Employment

Following up briefly on part of Tim's post, once the economy turns the corner, for wages to increase two things must happen. First, there is a lot of expansion that can come from currently employed workers through expanded hours, reversing temporary shutdowns, eliminating forced furloughs, no longer allowing unpaid vacations, those sorts of things. These bring hours and other work conditions back to normal and hence do not place much if any upward pressure on wages. There is a lot of slack in hours alone that can be taken up before the existing workforce is fully utilized, and adding back hours that have been taken away does not require an increase in wages. (There are some cases where the wage rate was cut instead of hours, and even some cases where both happened, but because the proportion of firms that cut wages is relatively small, even if those wage cuts are reversed it would not have much of an effect on the overall wage rate, and it would be a one-time change in wages in any case, not continuous upward wage pressure).

Second, even if the existing workforce reaches normal (full) employment conditions, there are still a lot of workers who are unemployed, and they can be hired at the existing wage rate. It is not until the existing workforce returns to normal and the unemployed find new jobs that wages come under pressure. When the economy is at full employment, expanding the number of workers in a particular firm requires that they be bid away from other opportunities, and that pushes wages up. But when there is unemployment, there are no alternative opportunities and hence no upward pressure on wage rates.

Finally, note that when there is slack in the existing labor force due to a decline in hours worked, etc., there will be a delay between the time the economy turns around and the time when employment begins increasing. This isn't the only reason there is a delay in the response of employment, but it contributes to it.

    Posted by on Thursday, July 30, 2009 at 12:05 AM in Economics, Unemployment | Permalink  Comments (64)


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