EXCERPTS:
"It’s something workers don’t want to hear, but one reason the economic recovery isn’t generating more jobs is that wages are too high, said Robert Shimer, an economist at the University of Chicago.
Speaking on the sidelines of a conference at the Federal Reserve Bank of Atlanta focusing on problems with the U.S. job market, Shimer said a relatively small decline in wage levels of 3% to 5% would result in “significant growth in employment and consumption.” Shimer presented a paper on the topic at the two-day conference on Friday.
One reason this is a particular problem today is the U.S.’s very low inflation rate, said Shirmer. When inflation is high, employers can cut their labor costs simply by stopping or constraining pay increases. When that happens in the face of higher inflation, the cost of employing a worker falls as inflation erodes the value of that worker’s paycheck. One alternative is to offer lower wages to new workers, but that also creates problems, said Shimer. “Companies are reluctant to do that because it creates equity issues.”
“Wages will fall eventually,” which will help revive hiring, he said, but it will take a long time. That’s one reason he predicts the economy won’t return to more normal levels of unemployment, say 5.5%, for “many years.”
“But I really don’t have an answer for the question of how long it will take for wages to adjust,” he said. “It depends on things I can’t foresee — like how much inflation [the Fed’s bond-buying program known as] QE2 will generate.”
COMMENT:
Does this sound familiar? It should. If it doesn't, reread chapter 8 on what happens when the economy experiences a recessionary gap.
