The Case for Lower Wages and More Government Spending

By Derek Thompson

General Motors and the United Auto Workers union agreed last week on a new wage structure that works out to a 20 percent wage cut for GM employees, Steven Pearlstein writes. It was a small news story last week, but it represents a microcosm of the economy. With nearly one fifth of workers unemployed or under-employed, the best way to save jobs and boost productivity in the short term is for workers to accept lower wages.

This shouldn't be big news. In economics, prices fall with demand. Demand is down. The price for work -- wages -- should be down, too. But wages have a tendency to flat-line, not fall, in recessions. Workers refuse to work at lower pay and employers are afraid to lose good workers by demanding pay cuts. So instead of falling wages, you get falling employment.

Pearlstein suggests we all "look for creative new wage structures" to get the economy rolling again. That means "look for ways employers can pay employees less money." There are a couple ways to do this. Some we've tried, and some we haven't. We have tried hiring more part-time workers, off-shoring more jobs, and adding cheap positions. We haven't tried "job-sharing," the German plan where government and employers split the check for workers to keep more people in their old jobs even when demand for their product falls.

We also haven't really tried direct hiring. Let's say that wage cuts are, as Pearlstein headline announces, "the only way to get Americans back to work." If work is cheap, and out-of-work construction workers are plentiful, and we're paying them already to be unemployed, why not continue to pay them ... to work! The United States has hundreds of billions of dollars of infrastructure to update across the country, which we will eventually have to update, and labor will never be cheaper than today, with 30 percent of construction workers on the federal dole for joblessness.

The case for lower wages entails all sorts of conclusions, from cheaper public employees to cheaper private retirement packages. But it also makes a good case for the government writing checks to unemployed workers and saying: Fix this levee.

This article available online at:

http://www.theatlantic.com/business/archive/2010/10/the-case-for-lower-wages-i-and-i-more-government-spending/64488/