Pearlstein on Wage Cuts

Posted on  

"Pearlstein on Wage Cuts"

I bet a lot of people are going to despise today’s Steven Pearlstein column advocating lower wages for American workers especially since he throws in a gratuitous paragraph suggesting that highly compensated newspaper columnists are the reason the US outperformed the USSR. But this is the paragraph with analytic weight:

Which brings us back to the story of GM’s Orion plant. There are lots of reasons why American companies like GM have lost market share (yes, I wrote about currency manipulation last week), but one is that in too many industries, our labor costs are now too high to be globally competitive. Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance.

It seems to me that neither Pearlstein nor some of the people I’ve seen complaining about him understand that Yuan revaluation is the same thing as lower wages for American workers. Almost everyone in the United States earns money according to a formula denominated in dollars. So if dollars become less valuable relative to other important currencies, our real compensation declines. By the same token, if the Federal Reserve succeeds in raising the price level, our real compensation declines. These are all related concepts—all ways of cutting the real wages of Americans.

However, of the three nominal wage cuts are really the least-attractive option. That’s because not only are our earnings denominated in nominal dollars so are our financial obligations. If you force nominal wage cuts on an indebted population, you get an unbalanced deflation where existing debt obligations come to consume a larger and larger share of income. Alternatively, if you reduce real compensation via currency devaluation or higher inflation you reduce income and debt alike allowing us to dig out of the balance sheet hole more quickly.

« »

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.