Further Evidence That I Am A Terrible Human Being

In “The roots of the German miracle,” Hermann Gartner and Christian Merkl argue that the success of the German labor market in recent years can be traced not just to short-term policies, like the Kurzarbeit short-term work initiative, but to structural reforms implemented over the last decade:

Without the wage moderation before the Great Recession, the German miracle would have been impossible. This is a point that is often ignored in the German public debate. The German Hartz reforms, which made the unemployment benefit system less generous, were certainly one of the reasons for the wage moderation. The reform was initiated in 2002 by a governing coalition, led by chancellor Schröder and the ruling Social Democrats. For some reason the Social Democrats are currently ashamed of this reform. If only they were to look at the facts from the Great Recession, they would surely be proud.

While “wage moderation” sounds friendly and pleasant, what we’re actually talking about is a process of squeezing workers, i.e., not increasing pay in lockstep with increasing productivity, thus keeping German workers in the tradable sector competitive with workers in central Europe, East Asia, and elsewhere. We eventually want to see wage gains, so that German households can enjoy a higher standard of living, but wage moderation before the global slowdown seems to have put Germany in decent shape.

This reminded me of Mark Whitehouse’s report earlier this month on the U.S. landscape:

From mid-2009 through the end of 2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947.

Then, of course, there is the concern that firms are piling up huge hoards of cash rather making investments in illiquid assets, behavior that Alan Greenspan and many on the right attribute to anxiety over the pace of government activism and rising public debt, but that could have many causes. Whitehouse continues:


To some extent, it stands to reason that workers would do poorly in the early stages of a recovery. Unemployment is high, so they have little bargaining power. But that’s not what has happened during most of the recoveries of the last 60 years. Workers typically received at least half of productivity gains in the form of higher wages. Only in the recovery from the deep recession of the early 1980s, when inflation-adjusted hourly wages fell 0.4%, did workers do worse than they have in this recovery. Back then, though, inflation was much higher: In nominal terms, wages rose 5.7%, compared to 3.1% now.

I do wonder if this might put the labor in a somewhat better position in the event of another economic shock, i.e., there will be fewer redundancies the next time around, as we saw in the German case. What seems like bad news might prove to be good news if U.S. firms have a bigger cash cushion.

To be sure, wages are expected to rise a bit faster this year. And to the extent that raises remain small, they help insulate the economy from the kind of spiraling wage and price increases that typically lead to runaway inflation.

But that might not be much consolation on payday, particularly with the price of regular gasoline near $3.50 a gallon.

One of the arguments for moderate inflation is that it facilitates the process of moderating wages because people are psychologically resistant to decreases in nominal wages, but they’re less keenly attuned to the way inflation erodes the purchasing power of a given wage. The other benefit, of course, is that inflation also whittles away at debt. But this recent decoupling of wages and productivity might not be the worst thing in the world, if it makes firms more resilient. As the economy becomes healthier and as the labor market gets a bit tighter, we can hopefully expect better days ahead. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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