By NewdealDemocrat. Originally published at
One of my pet peeves is that economics as a discipline needs to import the entirety of learning theory from psychology, not just parlor tricks like the endowment effect. For example, learning from models.
To wit, once Jack Welch was successful in using a pay scheme at GE that ensured that a given percentage of employees would not get a raise in any given year, it was inevitable that other employers who adopt the idea until it spread throughout corporate America. And it not giving raises to a certain percentage of employees was successful, why not implement it across the board with *all* employees?
Monkey see, monkey do.
As I noted several weeks ago, even though we are at least closing in on full employment, the percentage of employers not raising wages at all has gone up in the last year:
And now, cue about how big companies, fat with their new tax cut $$$, aren’t planning on raising wages at all:
[E]xecutives of big U.S. companies suggest that the days of most people getting a pay raise are over …. [In] rare, candid and bracing talk from executives atop corporate America, made at a conference Thursday at the Dallas Fed[, t]he message [wa]s that Americans should stop waiting for across-the-board pay hikes coinciding with higher corporate profit …. to cash in, workers will need to shift to higher-skilled jobs that command more income.
….The moderator asked the panel whether there would be broad-based wage gains again. “It’s just not going to happen,” [Troy] Taylor, [CEO of the Coke franchise for Florida,] said. The gains would go mostly to technically-skilled employees, he said. As for a general raise? “Absolutely not in my business,” he said.
This is putting even more deflationary pressure on wages. Since the refinancing spigot has been turned off due to the end of the secular decline in interest rates, if wages don’t increase, exactly where do employers think increased demand is going to come from? Further, if companies freeze wages even during good times, what is going to happen when, inevitably, times turn bad?
Here again are two graphs I have run a number of times already, showing that the YoY% decline in wage growth averages over -2% during recessions:
Currently wage growth for nonsupervisory workers is running at 2.6% YoY. Wage freezes are likely to be endemic in the next recession, and even worse, outright wage cuts, potentially leading to a deflationary wage-price spiral, are a significant possibility for the first time in over 80 years.