Sunday, December 15, 2013

Ireland Is Reducing Unemployment By Reducing Wages

Ireland is seeing its labor market heal increasingly fast with unemployment dropping from a high of 15.1% in February 2012 to 14.1% in November 2012 and further down to 12.5% in November 2013. And contrary to some pundits this does not reflect enigration as employment is up 58,000, or about 3.2%, during the latest year, mening that employment is increasing faster than unemployment is decreasing.

Meanwhile, average hourly earnings dropped 1.8% in nominal terms (roughly the same in real, as inflation was roughly zero). Lower average earnings isn't a good thing as a self-end, of course, quite to contrary it is negative. However it can be the means to achieve a reduction in unemployment. And that seems to be what is happening in Ireland, more Irish are finding jobs because they accept lower pay.

This is of particular interest since Keynesians have argued that nominal wage cuts are basically impossible and even to the limited extent they're possible they wont work.


Blogger Ralph Musgrave said...

Re the last paragraph above, Keynes’s point about nominal wage cuts being pointless is actually compatible with nominal wage cuts raising aggregate employment in the Eurozone periphery.

The purpose of imposing deflation (in the “cutting demand” sense) on the periphery is to bring about internal devaluation. I.e. if wages and prices fall in a periphery country, that improves its competitiveness and in the long run reduces its indebtedness and facilitates a rise in demand in the country concerned.

That internal devaluation works very slowly and and involves high social costs. So I'm not saying internal devaluation is in practice too wonderful. But I don't see much alternative: apart from a quick and substantial and ENFORCED devaluation. That would involve FORCING through wage and price cuts which would be difficult and expensive to do.

1:18 PM  
Blogger Roger McKinney said...

I could be wrong, but it seems that Keynes argued that cutting wages would also cut spending by individual workers, so more workers earning less did not increase aggregate demand.

Mainstream economists fixate on the problems with internal adjustment, wage and price cuts, but ignore the costs of devaluation the currency or inflation.

3:40 AM  
Blogger EdinaDem said...

Shouldn't the baseline wage be part of this discussion?

Reducing wages (and increasing employment) in an environment where people affected will continue to earn a decent living/livable wage and have the benefits of a sound safety net, is very different from lowering wages in a place like the US where this is NOT the case.

The former would possibly result in increased aggregate demand and be stimulative to the whole economy, unlike the latter.

6:05 PM  

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