Friday, October 15, 2010

Increase Quantity of Labor by Decreasing Price

Here's something I've been thinking about, but could never articulate so clearly:
This shouldn't be big news. In economics, prices fall with demand. Demand is down. The price for work -- wages -- should be down, too. But wages have a tendency to flat-line, not fall, in recessions. Workers refuse to work at lower pay and employers are afraid to lose good workers by demanding pay cuts. So instead of falling wages, you get falling employment.

Pearlstein suggests we all "look for creative new wage structures" to get the economy rolling again. That means "look for ways employers can pay employees less money." There are a couple ways to do this. Some we've tried, and some we haven't. We have tried hiring more part-time workers, off-shoring more jobs, and adding cheap positions. We haven't tried "job-sharing," the German plan where government and employers split the check for workers to keep more people in their old jobs even when demand for their product falls.
This "stickiness" helps explain why unemployment is a slow measure of an improving economy.

1 comment:

  1. I believe that the wage follows the formula
    Wage = Fixed Part + Variable part .
    The part which varies with demand is variable part and in very rarest condition anyone will take a hit on the fixed part .


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