Why wages are sticky downwards

My thanks to commenter Eamonn Moran who pointed me to this paper recently published by the Central Bank, and which deserves a wide readership, especially among advocates of “internal devaluation” strategies across the Eurozone periphery. The Irish figures are very striking, not just in terms of how few firms have cut wages here, but of the reasons why.

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33 thoughts on “Why wages are sticky downwards”

  1. ‘Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types’.

    It’s obvious, isn’t it?

    Incidentally, I wonder what forcing a larger adjustment on a certain group with in an organization would do to morale? Say worse wage cuts, worse pensions and worse/insecure T&C for a specific group.

    Presumably it wouldn’t be advisable. Let’s say, those under 35 year olds. While maintaining previous conditions, where possible, for another, say over 35 year olds.

    Scene: Two 50+ men in the Dail bar supping a pint
    ‘Well of course it’s unfair and we all know of people doing the same work hate to be treated differently. Ah ra sure it’s the politically easiest thing to do, and the unions are on board, and shure aren’t they lucky to have a job, they’ve a lot more opportunity that we had, if they don’t want it there’s always Australia. Besides we’ll be long gone before the consequences bubble to the surface in any meaningful way.’

  2. “Why commercial rents are very sticky downwards”with upward-only rent reviews tied to 35 year leases.

  3. No worries Kevin.

    Actually I made an error.
    I presumed the data was fairly up to date as it was a 37 page report that was released last week by the central bank. Actually it seems the data is 5-6 years old.

  4. We’ve just had a housing boom. People have large mortgages.

    Obviously people *must* leave employers at a certain point if they are to meet their financial obligations.

    That is obvious, right?

  5. Eamonn’s comment is very important – the survey was conducted around the end of 2007 and reported wage cuts were during the prior five years – so essentially it covers the period 2002-2007 (the boom) – rather than the bust.

  6. This is true, and you would expect the numbers of firms reporting having cut wages to be much higher if you asked them today. Especially in Greece (though it is not in this dataset), the only Eurozone periphery country to have experienced average wage cuts. And yet there are a lot of firms in this sample, in a lot of countries. Some of these firms must have experienced hard times, and yet hardly any cut wages. And this isn’t something that can be simply pinned on unions or regulation or whatever — the reluctance to cut wages is something that seems inherent to running an organisation where the quality and morale of employees are important. Wages just are sticky downwards. Which makes strategies that rest on the assumption that they are flexible downwards foolhardy.

  7. “Just over two percent of firms had cut wages over the last five years at the time of the survey”. I think this should be put on a postcard and sent to every journalist in Ireland for memory.

    In my field of research; comparative political economy, the conclusions of this report are obvious and uncontroversial. But having the ECB stamp might get policymakers to realise that an internal devaluation is a myth.

    If EMU countries are serious about reducing wages and prices then a planned and coordinated prices and incomes policy is needed. This requires centralised trade unions and employers to strike a deal with government and subsequently have the capacity to implement it. This is not possible in a de-regulated flexible labour market, with weak unions and employer associations such as Ireland.

    Those EMU countries that have been able to coordinate wages and prices in the interest of competitiveness are those with robust collective bargaining institutions (which act as a counter-cyclical restraint on the boom-bust tendencies of the market). The lesson to learnt: social partnership is a benefit not a constraint in the labour market.

  8. This study – apart from being based on out-of-date figures – tells us absolutely nothing that is not rather obvious. Moreover, it succeeds, as happens with many papers prepared by those paid from the public purse, in ignoring a simple fact of life; firms that cannot make a profit go out of business. If those surveyed chose not to cut wages, one must assume that they had cost structures which allowed them to cope and to stay in business.

    This natural control of the market is mostly absent outside of the private sector; that is until the market for a government’s debt introduces it, the situation in which Ireland finds herself (against a background of a worrying widening of bond spreads which seems not to be impacting the other peripherals!).

  9. So wages are Downwardly sticky in a boom. Come back in 5 years & tell us what happened in the bust.
    Kevin point is interesting. Do private sector firms prefer to lay off certain workers rather than cut wages for all. This being the case they start with the least experienced, lowest skilled etc.

  10. Um, okay, so it’s bubble figures for Ireland.

    No account is taken of increase in private sector unemployment/short-time working. (Any company will look at its total wage bill, not at the hourly cost of employees, why do economists not do the same? Why look at hourly costs at all? Because they tell a particular story?).

    Greece doesn’t/didn’t have a private sector pay problem.

    Aside from that, though, the play was great… spin up another report there Dinah…

  11. Wages for permanent employees don’t need to be cut – the savings in day rates paid to contract and temp staff (rates have fallen dramatically over the past five years) are more than enough…. and noboby in MegaCorp gives a rats about the morale of contractors and temps.

  12. Time is another key variable. There is a reluctance to reduce labor time with a preference for laying off workers. Why not a four day week or a three day week to maintain employment levels and divvy up the available labor time? This could also refer to the civil service …

    Industrial firms in Germany lead the way here – reduced time maintains the skill levels during downturns and allows for rapid increase in production during an upturn – this appears to be alien to the Irish.

  13. http://www.ft.com/intl/cms/s/0/efc23e54-cde0-11e2-a13e-00144feab7de.html

    “In the aftermath of the terror attacks on America of September 11 2001, tightened airline safety regulations around the world forbade passengers from taking knives on board. Victorinox had long sold many of its bladed gadgets through airport stores, and within months the company’s sales had plummeted by 30 per cent.

    Many corporate chiefs would have responded to a shock of this magnitude with a hefty cut in staff numbers. But Elsener was not going to make anyone redundant. Instead, the company cut shift times, cancelled overtime, encouraged some to take holidays and lent an additional batch of employees to other companies in the region.”

    I suppose house prices, pull and shortsightedness are responsible for what’s happening in Ireland. The insiders won’t have enough young wans to fund their pensions.

  14. @ seafóid

    “I suppose house prices, pull and shortsightedness are responsible for what’s happening in Ireland. The insiders won’t have enough young wans to fund their pensions”.

    They will, because pretty soon you will see an abundant transfer of the housing stock to young immigrants already here and more that will be invited.

    I regret to say it but the insolvency of Irish people will commence in large numbers and the redistribution of their homes will also commence once the phoney war of words about the “solutions” being offered are show to be completely bogus.

  15. The reason why salaries are sticky downwards are the people in charge are adept and in positions to hide the true rates of salaries and pensions. They can trick around with unemployment figures. They have resorted to intergenerational debt and emigration while at the same time signing up for bogus national wage agreements. Absolutely no need to concede anything when you are prepared to use all these ploys.

    On taxation they have disregarded peoples private personal debts, their negative equity and inability to pay and instigated a series of taxes on property and water. Now, there is the prospect of a capital gains tax being mooted on peoples principal private residence. All of this makes salaries sticky.

  16. Inflation is the usual almost painless cure for sticky wages, rents, pensions (unless indexed) and many other rigidities.

    Plus it effectively increases the Gov’t’s tax take.

    Right up there with Adam Smith’s invisible hand.

  17. Germany is not the only country that uses the short time tactic. Many countries use it sectorally usually with large unionised companies that export 25% or more of production (import substitution is also a factor). This is usually a 20% or 40% cut in hours with the 20% to 40% eligible for government unemployment benefits.

    Germany’s most valuable tool in a downturn is the 13th month bonus which is not paid if the company incurs a loss in the current year. For example if 2012 was unprofitable there would be no end of year 2012 bonus. Add short time to that and very few companies go out of business in the normal recession.

    The Anglos tend to rely on lay offs alone. A hang over from their uncivilised dog eat dog, 90 day horizon past.

    The Germans will hold on to market share come hell or high water over whatever length of time it takes to the recovery. Staying power?

  18. Nice to see so many expressions of faith (in the absence of any evidence) that private-sector wages simply cannot be sticky downwards in the current conjuncture. Doesn’t fit the narrative, see.

  19. German GDP, Christian Noyer, governor of the Banque de France recently commented, “contracted almost twice as much as in France in 2009.” But Germany’s greater labour-market flexibility allowed for a much faster rebound. France lost 500,000 jobs in that period, while German unemployment “remained stable,” in part because businesses could cut working hours when growth slowed.

    German collective agreements also have provisions for periods of recession.

    PR Guy correctly highlights dual markets and while contract workers give a bogus impression of entrepreneurship in a country, they are the first to be fired in a recession or when terms are renegotiated, they do not appear in labour statistics.

    Ireland also has a dual economy with the FDI sector feeding into global supply chains while there has been a lot of job shedding in the SME sector.

    Pay cuts taken by the self-employed again would not be reflected in data nor would additional hours worked in small family firms.

  20. Re-structuring and lay-offs are usually a better bet for a business that is trying to return to profitability, but those options are not available in the public sector.
    Does this mean that wages are inevitably sticky? If a sector contains many firms that are unprofitable due to high wages alone, then over time those firms will disappear, creating unemployment and opportunities for new firms to hire at lower wages and thus make a profit. It does seem to imply that for private sector wages to decline you need a high rate of business failures – and high unemployment. It would be interesting to see data for Ireland over the past five years because we have had both of those conditions. Do you know anyone who was laid off and then took a job with lower pay? I do.

  21. @Ernie Ball

    Nice to see so many expressions of faith (in the absence of any evidence) that private-sector wages simply cannot be sticky downwards in the current conjuncture. Doesn’t fit the narrative, see.

    I believe the argument has followed the traditional course of debating the right on economic matters.

    * X is simply not true – that would defy the awesome power of the invisible hand (as we now understand it)!
    * You have insufficient evidence to prove X you dirty workshy hippies. Stop wasting my time.
    * Everyone knows X but it does not matter because of restorative power of the invisible hand of the market.
    * Due to our lack of obeisance to the Invisible Hand the economy is ruined – we need to move on from the pointless debate about X. We refuse to play the blame game.

    Repeat until the elites are purged of the influence of the right for long enough for society and the economy to recover.

  22. @ skeptic01

    In the early years of the last decade, The Irish Times raised the pay of senior personnel while cutting jobs.

    More recently in the industry, there have been a number of pay cuts at INM and the Examiner Group.

    The new owners of The Sunday Business Post have set a condition for staff to agree to entitlement to only statutory redundancy.

    @ Shay Begorrah

    There are business folk who treat their staff well when they can and they may pay little or no attention to the works of Adam Smith or Karl Marx.

    It’s not a pleasant experience for anyone involved to see a once viable business struggling and then dying.

    Choosing who to let go when downsizing is also a difficult process.

    In the late 1980s as a financial manager in a company, I had to defend a decision in Beggars Bush when one employee from a number that were made redundant, took an unfair dismissals claim.

  23. @Michael Hennigan

    In my twenty year working life I have had two experiences in companies that were in financial trouble, one retrenched significantly and then flourished after a traumatic change in senior management and one just slowly decayed.

    Creative destruction just looks like decay from the front end and I have to imagine that it feels a lot worse to be fired than to do the firing.

  24. @ MH

    The right approach to take will obviously vary. In some businesses an agreement to reduce pay may be a life-saver. In other cases it will make little difference.

    Cases of some personnel getting a pay rise in the midst of lay-offs may not be all that uncommon. Firms that are laying off staff often simultaneously face retention problems with their remaining staff, who want to leave because of the bad atmosphere and loss of confidence in the business.

    I honestly don’t know whether the staff of Irish newpapers are overpaid, but clearly the sector faces a big challenge to its business model from new media, which has little to do with pay. INM has also had problems with debt and board-level infighting. As Shay observed, restructuring the senior management is often job #1 to turn a business around!

  25. @skeptic01

    As Shay observed, restructuring the senior management is often job #1 to turn a business around!

    While I believe that some of senior management have to go in any major restructuring in the case I have experience of it was a requirement of creditors, they wanted their own person in if they were to invest more. The former management went on to start other successful companies (with better calibrated expansion plans).

    Still, accountability has to be a part of company management, or any kind of management. Imagine if the top tier of DG ECFIN and Olli Rehn had to face performance reviews. A few redundancies in the European Commission might concentrate minds on seeking better policies rather than selling the current failed ones.

  26. @ PR Guy

    THE UK and the Germans to the thing which is best for the economy as a whole. THE UK use inflation to mask necessary real wage cuts in a recession. They opt for this over job losses. The policy got cross party support. Ed Balls stood up to the TUI on this even though going with them would have been much more popular. In Ireland we do the opposite. We cut jobs in exchange for wage stability. Exactly the wrong policy.

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