Paul Krugman looks again at the relationship between deficit reduction, wages and employment in the USA.
Yglesais says that a decline in deficit could lead to further employment expansion if it led to lower general wages (through a more flexible wage system) .
Krugman argues that this misses a key point: when you cut the price of something, it normally get cheaper relative to other things and this allows a redistribution of spending towards the cheaper good. But “when you cut the price of everything -which is more or less what happens when wages fall across the board – there is nothing to substitute away from”.
So, Krugman contends, the argument is not just morally wrong (because it inflicts further pain on people who are not responsible for what happened to the financial system) but it also technically wrong. It won’t have any positive effect on employment and could well prove negative.
This issue does not arise in Australia because (a) Australia has a much higher relative minimum wage than in the USA (b) we have a much stronger Fair Work Act and (c) Australian levels of unemployment are much lower than in the USA.