Folk economics: wages and prices

Mish Shedlock is one of the few economic crisis bloggers who maintains that the U.S. is actually sliding into a deflationary spiral. The following email to him is from a post where he continues that argument, but what I found disturbing was the ground-zero glimpse at how wages are now being set.

Mish, I was a true believer in the “hyperinflation is coming” theory for quite some time. However, I have since changed my mind. Here’s why: I own a computer business and I used to pay techs $15-20/hr. I now have people willing to work for $8-$10/hr. While the nice guy inside is saying “pay people well” the businessman is saying “market conditions demand paying people what the market will support.”

Recently I have had to offer price discounts to obtain new business. Some contracts I picked up were for around 1/3 of my standard fees. I have cut costs to the point where they can be cut no further if I am to maintain my debt obligations. I am now at the point where my options are to work more hours for less money or “exploit” the labor market. Considering that I am already working 80-90 hour, there was no choice.

I just interviewed a single man nearing retirement age with a young daughter a couple years older than mine. He is not only willing, but trying to hide the fact that he’s DESPERATE to work for $8-10/hr. I might be able to afford to pay him $12/hr today, but with what’s coming over the horizon, wisdom dictates paying him $8 and using the difference to lessen debt obligations as quickly as possible. That would lower my costs for when the available business gets even tighter, leaving me in a stronger position to bid and win, and helping make sure he’ll still have a job in 12+ months.

As it seems to me, high debt load, plus rising product prices, plus deflation’s hit is painfully powerful. I’m confident from reading your articles that it’s only going to get worse.

We are sometimes lulled into thinking that if our own personal costs go up, we will eventually be able to “pass along” those costs in the form of higher wages. But it isn’t true. According to historian David Hackett Fischer in his book The Great Wave, real wages, i.e. wages relative to prices, have entered long periods of decline four times in the past eight hundred years, periods that last between one and two hundred years and end with real wages cut by more than half, at which point some sort of disaster comes in to reset the system.

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