I don’t usually read (or cite) Sherry Cooper, chief economist for BMO Capital Markets, but in a recent article she was on the money:
Layoffs and reductions in hours worked have been accelerating in recent months and cover firms in virtually every sector of the U.S. economy. The same has been true in Canada, but to a much lesser degree as our jobless rate is below the U.S. This, in itself, is contractionary, but now it has taken on an even more troubling aspect. For the first time since the Depression, workers have been willing to take pay cuts in the hopes of keeping their jobs….
Not since the 1930s have we seen this phenomenon. The last time salary freezes were popular was when we attempted to reduce government budgetary red ink. Lower personal income means lower personal consumption, which in turn leads to reduced production, sales, and revenue for business. In consequence, capital spending plans are shelved and prices fall. This wage-price deflationary spiral is very difficult to stop and it points to continued weak economic activity.
Cooper is suggesting that workers are electing to do this of their own free will, but it is usually being forced on them by people like federal industry minister Tony Clement and others, compounded by all the economic policies that have undermined the power of workers.
I’m not incredibly concerned about the price side of the deflationary spiral: we’ve had ongoing declines in the price of many capital goods for some time, housing will become more affordable as it falls further in price, and the Bank is continuing to print money. But a downward slide of wages should be a major concern. In a recent reaction to Clement’s move:
”This is a destructive strategy,’‘ says Ken Georgetti, President of the Canadian Labour Congress. ‘’If the Great Depression of the 1930s taught us anything, it is that lowering wages creates a downward spiral without bottom. Workers who lose their purchasing power can no longer support their local businesses and communities.
Chief bank economists and the president of the labour congress on the same page. Are Clement and Flaherty listening?