Price deflation isn’t necessarily a bad thing if it is short-lived and does not lead to downward pressure on wages. But falling wages produces a nasty spiral. Not only do consumers have less to spend, but worse, even if they keep their jobs, they can be legitimately worried about even lower pay packages down the road.
Of course, wages may simply fall in correspondence with prices, purchasing power could be maintained. But with memories of gas and food price rises still fresh (and I am still seeing meaningful food price increases), workers have good reason to be concerned that their standard of living could fall. And that does not include the nasty factor that most consumers are carrying debt, both mortgage and personal which is unlikely to deflate in line with a reduction in earnings (although Bernanke is doing everything in his power to engineer that)
And even if that wage earner squeeze is illusory (ie, deflation is symmetrical enough that his standard of living is intact), he is exposed to commodity price increases. Fed policy is indifferent to the dollar; in fact, Bernanke would probably like to see it considerably lower, since the 1934 devaluation played a big role in putting the US back on the growth path (policy errors in 1937 put the recovery in reverse). But, say a 30% to 40% fall in the dollar means considerably higher energy and food prices, which hit the vulnerable particularly hard.
Fedex is cutting pay 5%. In the UK, tens of thousands of workers are having an extended Christmas holiday as employers shut down through Jan. 19 to conserve cash. Cerberus has offered its New Page (coated paper mills acquired from Mead WestVaco) union employees a four-year contract with no wage increases the entire time, benefit cuts, and reduction of overtime. That’s tantamount to a pay cut.
The New York Times gives more examples of pay reductions, generally in the form of short workweeks or unpaid vacations. However, the Times candy-coats this development, presenting it as a “win-win” that saves jobs, as opposed to a further grinding down of workers who have had stagnant real wages since the mid-1970s. Admittedly, so far employees have reportedly gone along with these moves. But I must cynically note that everyone quoted in the article is either a manager, an expert (a consultant or academic) or if a worker, was presumably interviewed with management’s knowledge. And let’s face it, labor has no bargaining power in the US. Acquiescence is the only option.
From the New York Times:
A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.And in some cases, workers are even buying in. Witness the unusual suggestion made in early December by the chairman of the faculty senate at Brandeis University, who proposed that the school’s 300 professors and instructors give up 1 percent of their pay.
“What we are doing is a symbolic gesture that has real consequences — it can save a few jobs,” said William Flesch, the senate chairman and an English professor.
He says more than 30 percent have volunteered for the pay cut, which could save at least $100,000 and prevent layoffs for at least several employees. “It’s not painless, but it is relatively painless and it could help some people,” he said….
At some companies, employees are supporting the indirect wage cuts — at least for now. The downturn hit so hard, with its toll felt so widely through hits on pensions and 401(k) retirement plans and with the future so murky, that employers and even some employees say it is better to accept minor cuts than risk more draconian steps.
The rolls of companies nipping at labor costs with measures less drastic than wholesale layoffs include Dell (extended unpaid holiday), Cisco (four-day year-end shutdown), Motorola (salary cuts), Nevada casinos (four-day workweek), Honda (voluntary unpaid vacation time) and The Seattle Times (plans to save $1 million with a week of unpaid furlough for 500 workers). There are also many midsize and small companies trying such tactics.
To be sure, these efforts are far less widespread than layoffs, and outright pay cuts still appear to be rare. Over all, the average hourly pay of rank-and-file workers — who make up about four-fifths of the work force — rose 3.7 percent from November 2007 to last month, according to the latest Labor Department data.
Watson Wyatt, a consulting firm that tracks compensation trends, published survey data last week that found that 23 percent of companies planned layoffs in the next year, down from 26 percent that said they planned to do so in October. Companies say they are considering other cost cuts, like mandatory holiday shutdowns, salary freezes or cuts, four-day workweeks and reductions of contributions to retirement and health care plans.
Mikkel 
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So, tell me Harvard, why is it that in a contracting economic base with wage deflation, the eradication of millions of jobs and the shattering of personal savings brought on by our current economic malaise?
Why is it that we are going to bring in 500,000 temp visa people (h1b and L1) on top of the 1 million supposedly jobless new immigrants?
Why is it that every academic pundit pushes the flooding of labor markets with more bodies on the misguided belief that supply makes its own demand?
There is no rationale here, except debasing US workers. And this crap of their being the best and brightest is just crap.
Astound me with an answer that does not involve cactus eating cats!