Giving Our Pay Packets A Shave Would Cost Jobs
Sydney Morning Herald
Saturday January 3, 2009
Mark Davis's suggestion that wage restraint would reduce the rise in unemployment this year is nonsense ("Give your pay packet a shave and help save jobs", January 2).
Unemployment will rise in 2009 not because workers were paid too much in 2008 (or earlier), but because households and businesses took on too much debt during a speculative bubble that has now burst. In the aftermath, sane people attempt to reduce their debt but that means a reduction in spending, which causes unemployment to rise. To reduce that rise in unemployment, you have to tackle the root cause by making it easier to repay debt. Reducing wages - even cutting the rate of growth of wages - will make that harder, not easier, especially since many of those who are trapped by debt are workers. That Davis's argument is supported by economic modellers confirms that the case is poorly thought out. These modellers completely failed to anticipate the global financial crisis because their neoclassical models ignored the role of debt. John Maynard Keynes discussed similarly naive thinking during the Great Depression. Though he agreed that real wages should fall, he said there were two avenues to achieving it: causing inflation, or reducing wages. Keynes argued that a fall in money wages would simply cause prices to fall further, adding to the deflation that made the Depression so intractable. He concluded that given the excessive burden of debt and the fact that falling prices would make debt even harder to repay, "it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy". Indeed. Associate Professor Steve Keen School of economics and finance, University of Western Sydney, Penrith
© 2009 Sydney Morning Herald