Thursday, April 5, 2012

"Europe and the Law of Sticky Wages (technical)"

On top of morose, despondent, borderline suicidal, the Telegraph's Ambrose Evans-Pritchard is getting technical.
From the Telegraph:

How is wage erosion going to play out across Europe’s Arc of Depression?
The Federal Reserve Bank of San Francisco has an essay on its website showing that US wages in the industries in most trouble have scarcely dropped at all since the onset of the Great Recession - despite economic - even though the country has one of the most flexible labour markets in the world.
You can erode real wages through inflation, but it is nigh impossible to cut them in absolute terms. They are famously "sticky", as Keynes warned in the 1920s. Call it cultural resistance if you want, or human psychology, or common sense.
Employers are loathe to cut to nominal wages because this "can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986)".
So how on earth is this going to play out across Europe’s Arc of Depression, with Franco-era labour laws still only partially reformed in Spain, and Mario Monti struggling to push through reform of Article 18 of the labour code?
Portugal, Italy, and Spain need an "internal devaluation" of around 20pc to claw back competitiveness within EMU. This means draconian wage cuts for year after year.

Yes, Mussolini pulled off a 20pc cut in wages with Fascist control over the unions to underpin his Lira Forte policy in the late 1920s. How can a democracy bring about such cuts in private sector wages without use of police coercion?

The Baltic states have done so in very particular circumstances, but mostly with devastating falls in GDP (26pc top to bottom in Latvia, and some have the gall to cite Latvia as a success story). Such economic contractions across Club Med as a whole would be large enough in aggregate to tip the whole eurozone into catastrophe....MORE
Arc of depression? I believe I shall go and channel my inner Eeyore.
"It's snowing still," said Eeyore gloomily.
"So it is."
"And freezing."
"Is it?"
"Yes," said Eeyore. "However," he said, brightening up a little, "we haven't had an earthquake lately."