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The Progressive Economics Forum

Dangers of Wage Deflation

I’ve just read an excellent paper “From Financial Crisis to Depression and Deflation” by Hansjorg Herr of the Berlin School of Economics, circulated by the Global Union Research Network (but not yet posted to their web site.)

Herr argues that demand deflation is inevitable in a downturn like the one we are in, but this becomes really dangerous for the macro economy only when accompanied by a deflation of costs, especially unit labour costs. Nominal pay in this view plays a positive critical role in forestalling a serious deflationary crisis.

In the Canadian context, given trand productivity growth of about 1% per year (OK perhaps a bit less) and an inflation target of 2%, nominal pay should be rising annually by about 3%. That is happening so far, but for how much longer? Note that Flaherty has called for federal wage controls to secure 1.5% increases from now on;  Clement wants wage cuts for auto workers; and right wingers such as Gwyn Morgan are screaming for pay cuts for public sector and indeed all unionized workers.

It is far from clear if nominal wage growth can be stabilized in today’s highly “flexibilized” neo liberal labour markets. Hess’s key argument is that the nominal wage anchor is anchored in now very fragile labour market institutions, and should be backed up by strenghtening collective bargaining and raising minimum wages.

Enjoy and share:


Comment from Leigh Thomson
Time: January 26, 2009, 12:16 pm


Flaherty and Clement again not playing by the rules. guess tidy economic theories won’t help much here.
Unions will.

Morgan is predictable, as a board member of SNC Lavalin which profits from war directly and which also just got a big fat contract for water infrastructure in Afghanistan.

It benefits board players to throw temper tantrums. They need cheap labour to keep subsidizing their profits, wrought with the blood and thirst of others who cannot afford their ‘products’. Perhaps they’re in line to get some of Baird’s water system money too.

And if workers refuse to play this game, Harper and his cosy cabal will be ready with higher ‘security’.

All so predictable, and pathetic.
Not just the Harper gang, the whole system needs rehab.

Comment from Paul Tulloch
Time: January 26, 2009, 2:48 pm

Adding on to my last post, concerning this-

I was just thinking out loud to my 8 year old son.

Kind of ironic that traditionally it has been the ability of labour unions that have somewhat been able to slow the decline in wages by providing resistance to wage restraints during these times of decline. “stickiness of wages” is what I think they call it.

This makes for an quite interesting dynamic.

If a multinational who operates in many Labour relations environments , faces these deflationary pressures, will it whipsaw unions across these national boundaries. Can unions with different densities and qualitative differences, withstand these pressures for adjustment across borders. Do borders matter?

Alternatively, one could argue, which I think this article does, that given the neo-liberal assault on trade unions across the globe and more specifically there relative decline in the US, will the wage deflation accelerate faster in the US, and given its economic integration, will this increased velocity, drag the rest down with it, or can we resist by insulating somewhat through our labour market institutional national differences.

I guess in Canada, with Tories in charge we will have to through in the wild card variable, that labour market institutional insulation can easily be circumvented by government policy stomping all over tradition.

This given Jim Stanford’s excellent report today comparing auto sector productivity from a multinational perspective. This throws in another variable.

Hello Clement! Nothing like throwing fuel on your own fire. Does he really believe he is an industry minister.

Ohhh poor canada.

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