The Dangers of Wage Cuts

A few weeks ago JCB workers offered to take a pay cut in a bid to prevent hundreds of job losses – their stance was admirable but such has been the drop in demand for JCB’s products that the redundancies went ahead anyway. Today we hear that workers at Corus (bought last year by the Indian steel giant Tata) may have to agree to across the board pay reductions of ten per cent in a similar attempt to stem likely labour shedding.

These are the high profile pay and wage reductions that make the headlines.

But there are countless examples of downward pressure on pay packets – either in the form of cuts in hourly wages or fewer hours worked – that are affecting people throughout the economy, many in small to medium sized businesses.

This BBC news clip looks at the example of a yacht company in Plymouth

Whilst wage flexibility can be a useful tool in minimizing the likely scale of redundancies in employee head counts as the downturn bites, there are dangers if wage reductions become widespread and expected. Here is a timely article by Edmund Conway in the Telegraph that considers the impact of lower pay in an economy at risk of entering a deflationary spiral.