David Rosenberg: Wage Deflation Is Here

david rosenberg

The deflation vs. inflation debate seems to be settling down, with everyone agreeing that we’re seeing both at the same time.

The split is: Things we want to see going down are going up (oil, food) and things we want to see going up are going down (houses, wages).

In his latest piece, David Rosenberg talks wage deflation:

A survey conducted by YouGov for the Economist magazine found that 5% of
respondents had taken a furlough this year and 15% had accepted a pay cut
(see The Recession and Pay: The Quiet Americans on page 33 of this week’s

As wages deflate, workers are looking for ways to supplement their shrinking
income base, for example, by moonlighting.  Indeed, a poll undertaken by
CareerBuilder.com and cited in the USA Today found that one in every 10
Americans took on an extra job over the last year; another one in five said they
intend to do so in the coming year.  These numbers are double for the 45 to
54 year olds who now see early retirement, once around the corner, as an
elusive concept.  

Most pundits who crow about green shoots and about an inventory restocking
in the third quarter giving way towards some sustainable economic expansion
live in the old paradigm
.  They don’t realise, for whatever reason, that the
deflationary aftershocks that follow a post-bubble credit collapse typically last
for 5 to 10 years.  Businesses understand better than the typical Wall Street
or Bay Street economist and strategist that everything from order books, to
output, to staffing have to now be restructured to adequately reflect a
permanently lower level of leverage in the economy.  

Indeed, by our estimates, there is up to another $5 trillion of household debt
that has to be eliminated in coming years and that process is going to require
that consumers go on a semi-permanent spending diet
.  Companies see this,
which is why they are not just downsizing their payroll, but have also cut the
workweek to a record low of 33.1 hours.  Fewer people are working and those
that are still working have seen their hours dramatically cut this cycle.  
Companies are finding other ways to save on the aggregate labour cost bill as
well, which may be a factor reinforcing the uptrend in the personal savings
rate (see more below).  For example, a rapidly growing number of employers
are now suspending contributions to worker 401(k) plans.  According to a joint
survey by CFO Research Services and Charles Schwab, nearly 25% of U.S.
companies have either suspended their plans or are planning to do so (this is
up from 2% at the turn of the year).  Again, how we end up squeezing inflation
out of the system when the labour market is clearly deflating wages and
benefits for the 70% of the economy called the consumer is going to be
interesting to watch. 

The op-ed column by Bob Herbert in the Saturday New York Times really hit
the nail on the head on this whole ‘green shoot’ issue — how can there be
‘green shoots’ when the labour market is deteriorating at such a rapid clip
fully nine months after the Lehman collapse.  The full brunt of the credit
collapse may be behind us, but please, the other two shocks, namely deflating
labour markets and deflating home prices, are very much still front and
centre.  For every job opening in the USA, there are more than five million
unemployed actively seeking work vying for those jobs.  That is unprecedented
and nearly double what we saw at the depths of the 2001 recession
.  The
official ranks of the unemployed have doubled during this recession to 14
million and if you take into account all forms of labour market slack, the
unofficial number is bordering on 30 million, another record.  For those who
still believe that we somehow managed to avoid an economic depression this
cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet,
the centre for Labour Market Studies at Northeastern University estimates
that the real unemployment now stands at 18.2%, which is actually higher
than the posted rate at the end of the 1930s.

(Thanks to Pragmatic Capitalist for the pointer)

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