The Paradox Of Cutting Pay : Planet Money It's a race to the bottom, and everyone loses, Paul Krugman says.
NPR logo The Paradox Of Cutting Pay

The Paradox Of Cutting Pay

If you're looking for the news, take these: Citigroup and Bank of America are out in the weeds looking for $10 billion each in fresh capital, ahead of the stress tests results expected on Thursday. Fiat wants a chunk of GM, too, not just Chrysler. President Obama's intent on kicking over corporate tax havens, and on making Pell Grants for college an entitlement program like Medicare and Social Security.

But that's not where my heart is. I spent yesterday talking to a guy who's nearing the end of school and hoping to become a teacher. His advisor's telling him this is the worst year he has seen for placing new teachers in 20 years. I tried to tell him, hey, even your parents don't have a model for this kind of job market — it's bound to let up at some point. And you could see it cheered him not a whit.

Then Paul Krugman got me today with his column on wage deflation. A lot of you have told us about cuts in wages, either in your same old jobs or in the new ones you were lucky enough to find after getting laid off. At NPR, we're looking at what feels like a modest pay cut, in the form of five furlough days and the ending of certain paid holidays. Krugman writes that furloughs may save jobs at the level of the individual company, but they're bad for the overall economy.

For starters, Krugman describes pay cuts are a race to the bottom. As more workers from more companies undergo them, those companies lose any competitive advantage from cheaper labor. And there's more:

John Maynard Keynes put it clearly, more than 70 years ago: "The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period." And a rise in the effective interest rate is the last thing this economy needs.

Where else might we look for a model of this kind of spiral? Japan, of course, circa 1997. "[T]he risk that America will turn into Japan. . .seems, if anything, to be rising," Krugman writes.

Not what I wanted to hear, either, but hey.