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.