Wages During a Recession

An article in Business 2.0 points out that even in this tough economy, wages for engineers have on average continued to advance. The article also points out that unemployment now is much lower than it was in 1984.

The article suggests that people really just had unreasonable expectations for continued growth, and for quickly finding wealth.

The most interesting comment is found on page 3, where they discuss why wages still rise, even as unemployment is also rising.

The Keynesian types generally think employers shouldn't cut pay during a recession, because doing so would just further shrink consumer demand. Neoclassical economists passionately argue that if labor were "repriced," like everything else during a downturn, to reflect the new balance between supply and demand, the labor market would clear and there would be no unemployment.

So, why doesn't business behave neoclassically, by reducing wages? Because of the psychological effects of salary cuts. Workers that have their pay cut will quickly look to jump ship. Giving a pay cut is the surest way to make an important employee feel undervalued.

The solution is to layoff all but the most important employees. The core group of developers that remain then get the same pay hikes that they have come to expect.

This brings to mind a famous saying. "You can please some of the people all of the time. You can please all of the people some of the time. But, you can't please all of the people, all of the time."