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Wage cuts hurt, but they may be the only way to get Americans back to work

Autoworkers at GM's Orion plant, seen last week as the automaker announced its plans to build a new subcompact car at the facility, will work under a new two-tier wage structure.
Autoworkers at GM's Orion plant, seen last week as the automaker announced its plans to build a new subcompact car at the facility, will work under a new two-tier wage structure. (Jeffrey Sauger)

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While that was the reluctant conclusion of UAW leaders, not all their members agree. When a similar proposal was put last month to workers at a GM stamping plant in Indianapolis that is slated for closure next year, they turned aside the advice of the UAW leadership and overwhelmingly rejected it, arguing that it would inevitably spread and undermine the existing union wage structure.

And, of course, they're right about that. However unfair or unpleasant, it is precisely these kinds of structural adjustments that are necessary if the U.S. economy is to find a new equilibrium, one that provides not only for full employment but a sustainable balance between how much we consume and how much we produce.

What happens in most markets when supply exceeds demand is that falling prices bring in enough new customers, or cause enough producers to cut back on their output, until supply and demand get back into balance.

But labor markets are different. Unlike the markets for tomatoes or stocks, prices - that is, wages - don't necessarily rise or fall for everyone based on the result of the last transaction. Workers tend to get very grumpy if their pay is reduced, while employers don't want to risk losing their best workers by forcing them to take a pay cut.

As a result, companies generally respond to falling sales by laying off workers, which, when it happens economy-wide, creates a vicious cycle that depresses sales and employment even further. That's the trap we're in right now.

In many cases, a better alternative to layoffs is to cut everyone's hours and pay and spread the pain more widely. That's a popular approach in Germany, where the export sector is booming and the unemployment rate is now comfortably well below ours. California has also experimented successfully with a job-sharing plan, as it is sometimes called, using money from the state's unemployment insurance fund to help compensate employees for the reduction in pay.

I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness.

Unless we're prepared to settle for 10 percent unemployment for the next decade, we might want to follow the lead of GM and the UAW and look for creative new wage structures that will allow us to better spread the burden of getting the economy back into balance and make it possible to increase what we produce rather than what we consume.


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