The First Hints Of Deflation On The Employment Or Income Side

For years we have talked about deflation – the prospect of a shrinking economy, marked by lower prices, less credit, and falling income.  A deflationary period is marked by what is called the “vicious cycle,” where falling purchases by consumers leads businesses to lower prices for goods, which leads to less revenue for companies, which leads them to lower wages that are paid to workers, which leads the workers to buy less stuff, thereby causing prices to fall again, thereby completing and continuing the cycle.  This is the opposite of the “virtuous cycle,” which goes the other direction, where higher sales lead to growth at the company and higher wages, which lead to higher sales, and so on.

We have discussed the falling prices in our current economy, with housing being the most obvious, but sales at retail stores and cuts in prices for services also being noticeable.  The huge swaths of layoffs and flat out firings are apparent in the unemployment numbers, but what we have been missing is some sort of data on what is happening when people are re-hired.  It is not true that everyone who gets fired cannot find a job.  Many recently unemployed are finding work.  The question is, ”Are they making the same, more, or less than their old job?”  Our forecast has been that the falling economy will indeed lead to lower wages, thereby cementing the vicious cycle.  Unfortunately it appears we are correct.

The NYT ran an article today with some crude, preliminary data on this subject. Several groups, including the Hamilton Project, the Center for American Progress, and the National Employment Law Project weighed in from different angles, but the outcome is the same.  The high end workers (graduate degrees, jobs requiring high degrees of skill) are somewhat insulated, the bottom rung remains at the bottom but is facing mass unemployment, and those in the middle jobs (some college, median income) are falling to the lower rungs of work and pay, displacing those who used to be in those spots.  Essentially, middle income workers are losing their jobs and when they find other employment it is well below their previous work.

This development adds more fuel to the deflationary fire, as those workers will now show up as “employed,” so it looks good on paper, but they will not show up as high spending consumers, which will confound bureaucrats who will not be able to figure out why the employment numbers have stabilized but the economic picture continues to weaken. 

Read the original story at H. S. Dent