Wage Freeze for Government Workers
If Josh Barro had not written this:
As states and localities continue to fight budget crises, they have an opportunity to close gaps by freezing employee wages. Because public employee compensation rose too fast over the last three years, they should be able to do this while retaining quality employees at least as well as they could back in 2006.
then I would have. It’s crazy to be giving people pay increases in the teeth of huge deficits. Thanks to Scott Sumner for the pointer. Sumner takes the opportunity to tell the sticky-wage story of macroeconomic fluctuations.
there is a coordination problem. If you are a factory worker you can’t save you job merely by making your wage flexible, you need to make all wages flexible.
This idea of sticky wages as a co-ordination problem was being batted around when I was in graduate school (and probably long before that). I mentioned it back in lectures on macroeconomics, in lecture 4.
If you want to increase employment, I think that wage cuts would work pretty well in the public sector. Public sector expenditure is pretty well set in nominal terms, and government services are quite labor intensive. I would expect that, to a first approximation, 10 percent lower nominal wages in the public sector means, other things equal, 10 percent more public sector employment.
As far as I can tell, any argument for more government spending to reduce unemployment in this recession can be turned into an argument for lower salaries for government workers.
In the private sector, things are not so clear. If we cut construction-worker wages by 10 percent, could we have 10 percent more construction workers employed? I doubt it. We have an excess inventory of housing units to work off. And the unemployed construction workers are not going to be buying the output they would normally buy from other firms, so you get multiplier effects. In that sense, some amount of private sector unemployment is due to recalculation, and wage cuts cannot provide a complete cure.