Saturday, November 20, 2010

Wage Deflation and Economic Recovery

Profitable US manufacturing companies are using falling demand during the recession to force unions to agree to two tier labor force contracts. They did so under the threat that manufacturing would be moved to third world states like Oklahoma and other southern states that compete with high wage states by offering low wage workers up for sale. I can understand why companies would do this if they were losing money or if they were not price competitive with foreign firms. I cannot understand why Harley Davidson needs to do this to compete with BMW, for example, that pays higher hourly wages to its labor force than Harley Davidson. One of the reasons that they want more temporary workers, who do not receive benefits, may be related to the much higher cost of health care in the US. Health care prices in the US are twice those of other industrialized nations.

I also suspect that it may be due to the way in which we compensate executives. Top executives receive a large share of their wages from stock options. This provides an incentive for them to manage the stock price. This requires constant growth in profits to please Wall Street.

In any case, wage deflation in the US means that consumers in the US will have to reduce consumption. Since consumption is around 70% of the economy, economic growth in the US will slow going forward and multi-national corporations will continue to expand into emerging markets that provide better opportunities for growth. They don't care where their profits come from. Wall Street, and apparently the US government, share this perspective.

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