Slumping wages are unlikely to help correct our poor local economy

Slumping wages now are a widespread phenomenon all across Canada, but workers in the public sector look like they are able to buck the tide – at least for the time being.

Will falling wages help our economy to recover?

Unfortunately, they will only worsen the outlook.

Some of the givebacks have been essential, in the United States the price for federal aid.

Others, like the agreements on salary cuts, are the result of discussions between employers and their employees. Still others reflect the weak labour market triggered by the economic contraction.

While each case is different, yet falling wages are the symptom of our depressed economy.

Falling wages are proliferating. According to the latest data the average cost of employing workers in the private sector remains basically flat, a lack of increase unprecedented since the 1930s. Probably by the end of this year wages will be registering a decline.

Why is this a bad thing? In many cases, workers accepted pay cuts to save jobs and help their employers. Is that beneficial?

The answer lies in one of puzzles that are so confusing.

For instance, saving is a virtue, but when everyone tries to increase saving at the same time, the effect is less consumer spending and a depressed economy.

Again, when everyone tries to pay down debt, the result is a downturn in the economy.

Thus, when workers at one company accept lower wages to help their employers, that will assist the organization, but when all employees in Canada do this, the result is reduced spending.

Cutting wages make a company’s products more competitive, sales rise, and more employees can keep their jobs.

Yet if other companies’ employees take a cut in wages, there is no competitive advantage.

Beyond that, falling wages and declining incomes entail bigger problems with debt. It then takes longer to pay down a mortgage or credit-card debt.

The rising burden of debt will put downward pressure on consumer spending, obviously depressing the economy.

If wages were to fall by, say 2 per cent, the amount of interest payable rises by a like amount.

This is exactly what happened in Japan.

Private sector wages there fell by about one per cent every year for four years and the effects not only did not help, but made things worse .

Economic stagnation ensued.

Here as wages fall, that is a recipe for continuing weakness in the economy.


Bruce Whitestone