Reducing Real Compensation
By Arnold Kling
We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order
I would caution that lower real wages are only part of the solution to the Recalculation problem. The process also will involve transitions into and out of industries and occupations.
But it certainly would not hurt to reduce real compensation. Some ideas for doing this:
1. Cut the employer contribution to the payroll tax. Bryan first proposed this, and others, including Alex and myself, have pushed it since.
2. Reduce employer-provided health benefits, but not by taxing those benefits. Instead of expanding the government mandate for employer-provided health insurance, the government should mandate cuts in employer-provided health benefits. I am not saying that this is good health care policy (although I could make a case that it is), but it is certainly good recession-fighting policy.
3. Direct stimulus funds toward flexible-wage sectors of the economy. That is, not toward state and local governments. Or else tie state and local stimulus funds to provisions requiring salary freezes at recipient governments. Require state and local governments to use the lowest-cost contractors, rather than go with union contractors.
4. Reduce the leverage of labor unions generally.
Of course, a political party dedicated to increasing labor’s share of income (at least for those fortunate enough to have jobs) is not going to enact any of these policies. The friend of labor is the enemy of full employment.