One of the things that Philip has been emphasising since the start of the year is that if wages are cut to the point where workers feel confident that they won’t be cut further, they will then start spending again. On the other hand, workers who fear their wages will be cut in the future will, quite rationally, save for the rainy days ahead. The worst of all possible worlds, from the point of maintaining domestic consumption, would be a situation where wages fell, predictably, in slow motion, over a number of years.
So it is a matter of concern to read articles like this.
A further note: public sector wage cuts are required to reduce the possibility of a ‘sudden stop’ in lending to the Irish government. Private sector wage and price cuts are required to prevent unemployment from rising further: Ireland is still an unacceptably expensive place in which to live and do business. It is a matter of deep regret that these are not happening in an across the board manner, and that wages in significant sectors of the economy have actually been rising. Allowing the focus to be on public sector wage reductions alone misses this essential point, and represents a serious political failure on the part of the government.
We are seeing just how difficult it is to achieve nominal wage and price reductions in a modern economy, and just how useful it is to have a currency to devalue. But we don’t have one, and can’t leave EMU. Given that wages are proving to be sticky, and that there is no central Eurozone fiscal authority to help maintain demand here, emigration is the most likely margin of adjustment for our economy in the short run. These are the constraints that we signed up for under Maastricht, as Neary and Thom pointed out in the 1990s, and it is too late to start complaining about it now.