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Nominal Wage Cuts

By Matthew Yglesias  

"Nominal Wage Cuts"

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The combination of sky-high unemployment and policymakers’ apparently determination to persistently undershoot inflation targets means that the only way for the economy to adjust is via a cycle of difficult nominal wage cuts. Steven Greenhouse’s article on workers at a Mott’s plan resisting demands for such reductions helps illustrate the difficulties of the process:

“It’s disgusting, honestly, that they want to take things away from the people who made them profitable,” said Ms. Muoio (pronounced MOY-oh), a $19-an-hour machine operator who has worked at the plant 15 years.

The company that owns Mott’s, the beverage conglomerate Dr Pepper Snapple Group, counters that the Mott’s workers are overpaid compared with other production workers in the Rochester area, where blue-collar unemployment is high after years of layoffs at employers like Xerox and Kodak.

Chris Barnes, a company spokesman, said Dr Pepper Snapple was seeking a $1.50-an-hour wage cut, a pension freeze and other concessions to bring the plant’s costs in line with “local and industry standards.”

The company, which has 50 brands including 7Up and Hawaiian Punch, reported net income of $555 million in 2009, compared with a loss of $312 million the previous year. Its 2009 sales were $5.5 billion, down 3 percent.

The problem here is that both sides are right. Thanks to economic developments unrelated to the juice industry, there is high unemployment in the United States of America and especially high unemployment in the Rochester area where major employers Kodak and Xerox have been hurt by technological shifts. The result is that exactly as Dr Pepper Snapple says, the full employment wage for the area has gone down and thus in some sense wages at the plant “should” decline. Conversely, as the union observes Dr Pepper Snapple is a profitable firm even under current conditions and operating the plant at the current wage level is a profitable undertaking. There’s a lot of economic surplus to be had in operating this plant, it’s currently divided between the workers and the owners, and the workers quite reasonably don’t feel like giving it all to the owners for no reason. So now we’re in a classic bargaining standoff where there are a whole range of outcomes that would be better for both sides than a continued strike but precisely for that reason neither side wants to give in.

Appropriate monetary policy would, by getting the price level up, help ameliorate the difficulties involved in these wage adjustment issues. What’s more, it would do so while avoiding the debt-deflation problem that would arise if the entire economy tried to Mott-ify and start paying everyone less simultaneously.

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