The Daily Parker

Politics, Weather, Photography, and the Dog

Why cutting wages doesn't cut unemployment

Krugman has a good summary:

[T]he belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board.

Really, employment won't rise until after the fundamentals get better, and general wages have very little to do with it.

Specific wage decreases do have specific effects; however, smart employers avoid offering significantly lower wages to higher-skilled workers because they don't want those workers to leave as soon as conditions improve.

Comments are closed