Most of us have had this experience. Your favorite breakfast cereal box seems slightly smaller, or the candy bar you just bought doesn’t seem to last quite as long. When you look carefully at the box or the wrapper, you find that the item price is the same but there’s less in the package.
It’s hard to tell who hates price increases more, retailers or consumers. Most often, retailers raise their prices in response to their own cost increases. And their effort to pass on the added cost by reducing product sizes instead of increasing prices reflects their knowledge of consumer behavior, not any real effort at deception.
Consumers don’t like the stealth packaging — but they like price increases even less. This is what makes consumer prices sticky when economic forces, usually higher costs, are trying to drive them up.
What often happens then is that retailers hang on to what economists call the nominal price — the box of cereal still costs, say $3.79 — while the real price actually goes up because you get less cereal, candy, or other product, for your money.
Wages tend to be sticky, too, but in the opposite direction. Very few people will decline a pay increase but most people have some level of resistance to wage cuts.
Economist John Maynard Keynes made sticky wages, especially nominal wages, an important element in his general theory, for they provided an explanation of why an economy rocked by a recession would not automatically be able to right itself quickly.
His solution was for government to artificially create demand by deficit spending, and while that makes sense in theory, we have come to understand the serious limitations of that idea when it is translated into the real world.
In the context of sticky wages, then, it is clear that the still unfolding events in Wisconsin are nothing less than a head-on collision of economic ideas: deficit-funded stimulus programs vs. flexible wages. Certainly the political side, reshaped on the spinning lathe of news media, tends to dominate our view of what is happening there, but behind it all is economics.
The driving force behind the Wisconsin situation wasn’t anything as elegant as economics, or even politics. It was pure, raw expediency. The state government is running out of money and with no hope of rescue it is desperately trying to stay afloat.
The governor wishes to exert control over the state’s labor force, a major source of cash outflow, setting and resetting wages and benefits the way a private sector CEO facing a similar financial crisis would.
The unions representing Wisconsin’s public employees and public school teachers naturally don’t see it that way at all. From their perspective, wages and benefits for both current and retired employees are covered by contractual agreements and any changes would have to be approved by both parties – the governor and the union.
It gets more complicated than that, of course, given the changes in the collective bargaining law enacted in the state in 1999, but, at bottom, control of the labor force compensation is what the conflict is all about. The subsequent, deceit-based teachers’ sick-out, the demonstrations — for and against — and the comic opera school bus skedaddle by Democratic legislators are just added ingredients in the political stew.
Underneath the control issue lies an unanswered economic question: Would reductions in wages be a good thing for the Wisconsin economy, or, more generally, the U.S. economy?
When we view employment as a supply and demand issue, economic theory would tell us that reducing the price of labor, wages, would increase the number of people employed. And, up to a point, this makes good sense. A lowered wage certainly makes the hiring of a new worker more attractive.
If lowered wage costs were to coincide with a revival in consumer demand — as we are experiencing today — we can see how the economy could develop some visible, positive momentum, something that has been sorely missing these past few years.
We are also seeing some evidence of wage reductions in some jobs in the private sector and that is a good sign, for it shows that employers are at least getting over their hiring phobia that had frozen the economy in its tracks.
The options available to a tapped-out Wisconsin government aren’t pretty, and it is hard to believe, even in theory, that they would be helpful to the economy. If wages and benefits cannot be reduced, the alternative — mass furloughs and layoffs — would very likely drag the economy down faster and farther.
Of course, that’s economics. And, ultimately, it will not be an economics decision but a political one. That’s how it is and how it has to be.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
