Deflation: Wage rates and the employee VS the Employer

[NoodlesJefferson]

I would love to post this in the economic section, but... I am a newbie.

The Austrian school of economics says that deflation seems to have a positive effect on everyone and I would tend to agree. Inflationary economics seems to really be bad all around except for the government and central banks. In a In Keynesian/inflationary economics Goods and services tend to go up in price while the wages employees are earning go down in value every year, thus the need for employers to give out standard for living increases. In a Austrian/deflationary economy there would be no need for a standard of living increase as the amount of money they were making on a yearly or hourly basis would increase in its purchasing power each year.

Which brings me to my question:

Would there be job stability in a Austrian/deflationary economy?

I know there would be more jobs available, but It seems there would be no reason for a company to want to keep older employees as they are paying them much more in purchasing power than new employees.

For example: Lets say I, the employer, hired you, the employee, on at 10$ an hour. And for easy math sake lets say there is deflation at 10% a year. So the following year I hire employee number 2, who does the exact same job you do, at 9 dollars an hour. I pay him 9$ because I have adjusted his rate for his 10% deflation. Now lets say this continues for 10 years. As an employer, why would I want to keep you on at 10 dollars an hour when I could fire you, and use your 10 dollars an hour to hire 10 people to replace you at 1 dollar an hour. It seems like deflation would make a standard of living decrease common amongst business.

This is the only problem that I can see in the Austrian way of thinking. And in fairness it seems like a much better problem then having your wage purchasing power stripped away from you every year through inflation. It just doesn't seem to promote longevity in the career of an employee.  




Maybe a nice moderator can place this in the economics section for me

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[SgtSpike]

No, employers would just start handing out wage decreases instead of wage increases.

[BTC Economist]

Well, wage stickiness might make things a bit better for the employee, but employers would come up with some shenanigans.

[Richard at Wendel Services, LLC]

If in paying 10$ an hour the employee creates production value of 20$...with deflation of 10% the employer would now receive 18$ of productivity. They can adjust cost and keep the same percentage margin (50% cost per retail productivity unit) or keep labor happy and keep their pay higher and get lower margins. Market will adjust and producers will keep pace or go out of business.

-Richard

[NoodlesJefferson]

If in paying 10$ an hour the employee creates production value of 20$...with deflation of 10% the employer would now receive 18$ of productivity. They can adjust cost and keep the same percentage margin (50% cost per retail productivity unit) or keep labor happy and keep their pay higher and get lower margins. Market will adjust and producers will keep pace or go out of business.

-Richard

By adjusting costs do you mean they would lower the hourly rate of the employee?


To me this seems to be a similar problem to inflation and cost of living increases except in reverse. I feel like a cost of living decrease would be a tough sell to employees. "Thanks for doing a great job... now let me reduce your pay so I can make the same amount."

Also, this doesn't seem to promote job security or stability. Would Job stability suffer in a Austrian school economy?

[flaxindo]

I haven't studied the Austrian School, but I do know that Keynes has been completely discredited by by anyone who's actually bothered to notice what's been going on in our economy...

I know that Ron Paul is an advocate of the Austrian School, and he's the first politician I've believed has integrity since I was old enough to pay attention to the difference between what "public servants" (cough) say and what they actually do.

Not topical to the deflationary question regarding wages, but general to a prominent antidote to the dominant [collectivist/redistributionist/socialist/fascist] Keynesian followers.

[Richard at Wendel Services, LLC]

If in paying 10$ an hour the employee creates production value of 20$...with deflation of 10% the employer would now receive 18$ of productivity. They can adjust cost and keep the same percentage margin (50% cost per retail productivity unit) or keep labor happy and keep their pay higher and get lower margins. Market will adjust and producers will keep pace or go out of business.

-Richard

By adjusting costs do you mean they would lower the hourly rate of the employee?


To me this seems to be a similar problem to inflation and cost of living increases except in reverse. I feel like a cost of living decrease would be a tough sell to employees. "Thanks for doing a great job... now let me reduce your pay so I can make the same amount."

Also, this doesn't seem to promote job security or stability. Would Job stability suffer in a Austrian school economy?

The deflation did not lower their wage. The deflation artificially gave them the more cost for less production value. If deflation was accelerated to 90%, then a person working at the original 10$ would be producing goods worth 2$.

If they understand market pressure then they would also understand that their 1$ paycheck buys as much as 10$ used to before the deflation. They would also understand that if you are selling their retail production at 10% of cost they will very quickly be without work as you will be out of business. It is nice to keep employees, but if they fail to see value in making economically sound decisions, then they will find that I wouldn't see value in continuing to fund their dream world.

[flaxindo]

If they understand market pressure...

An informed populace... would have prevented the situation we are in right now. And I'm not talking about MtGox.

[Miracle]

I totally agree with your conclusion,

we need to break some myths of the old school of economics ,

I am currently working on a thesis on the impact of Bitcoin on world economy,

[JoelKatz]

If he can't lower your wage, he won't hire you at $10/hour in the first place. He'll hire you at $9/hour or he'll insist on the right to lower your wages to keep up with their declining value. Just as people get cost of living increases, they'll get cost of living decreases. *Predictable* deflation is easily accounted for.

This is the error in the argument that bitcoin deflation will cause hoarding. Unless you want to hold the bitcoins for some reason, you don't need to hold them to get the value they will gain through deflation. The value of each bitcoin includes the value of the right to hold that bitcoin and watch it increase in value. So if you transfer the bitcoin today, you can collect on that expected deflation immediately. There is no need to wait -- the expected inflation or deflation is already built into the price of things.

[Richard at Wendel Services, LLC]

The biggest problem with deflation is debt accumulation. With deflation any debt is more expensive to pay off than the value of the goods originally obtained with said debt. Right now the theory in the US with government debt is that it isn't a big a problem because we will eventually inflate our way passed the hump of our national debt. Not something I prescribe to, as the cost of government would then still increase at the same greater-than-inflation rate that got us in the hole.

Right now it is very hard (read: impossible) to setup an ENFORCEABLE, loan and debt society in BTC as without government support there is no government to validate the debt by force. I am not saying I want government anything tied up in BTC affairs, but contract enforcement should be currency neutral. If we could get a test case for breach of contract with BTC as the medium of exchange, that would do wonders.

-Richard

[JoelKatz]

The biggest problem with deflation is debt accumulation. With deflation any debt is more expensive to pay off than the value of the goods originally obtained with said debt.

Since the deflation in bitcoins is predictable, a bitcoin's value today already includes the present value of holding the bitcoin as it deflates. There can't be a significant actual increase in value just from predictable factors.

To give an analogy, suppose everyone knew for a fact that gold would hit $2,500/oz in two years. What would happen to the price of gold today? The assumption that something will go way up in value in the future will cause it to go way up in value today, preventing the future rise because it will have already happened.

[NoodlesJefferson]

If in paying 10$ an hour the employee creates production value of 20$...with deflation of 10% the employer would now receive 18$ of productivity. They can adjust cost and keep the same percentage margin (50% cost per retail productivity unit) or keep labor happy and keep their pay higher and get lower margins. Market will adjust and producers will keep pace or go out of business.

-Richard

By adjusting costs do you mean they would lower the hourly rate of the employee?


To me this seems to be a similar problem to inflation and cost of living increases except in reverse. I feel like a cost of living decrease would be a tough sell to employees. "Thanks for doing a great job... now let me reduce your pay so I can make the same amount."

Also, this doesn't seem to promote job security or stability. Would Job stability suffer in a Austrian school economy?

The deflation did not lower their wage. The deflation artificially gave them the more cost for less production value. If deflation was accelerated to 90%, then a person working at the original 10$ would be producing goods worth 2$.

If they understand market pressure then they would also understand that their 1$ paycheck buys as much as 10$ used to before the deflation. They would also understand that if you are selling their retail production at 10% of cost they will very quickly be without work as you will be out of business. It is nice to keep employees, but if they fail to see value in making economically sound decisions, then they will find that I wouldn't see value in continuing to fund their dream world.

I know the deflation did not cause lower rate. It caused the opposite.

You said "They can adjust cost and keep the same percentage margin." By "they" I am assuming you mean the business. So when I asked "By adjusting costs do you mean they would lower the hourly rate of the employee?" I did not mean deflation caused lower rates. I just wanted to know what you mean by "adjusted costs" in terms of "they."

So do you agree that this would not encourage job stability?  I am not interested in if an employee sees or doesn't see the value in funding a dream world. I am just really want to know how this works. It would seem to me that this could be a problem in a deflationary economy.

[NoodlesJefferson]

The biggest problem with deflation is debt accumulation. With deflation any debt is more expensive to pay off than the value of the goods originally obtained with said debt.

Since the deflation in bitcoins is predictable, a bitcoin's value today already includes the present value of holding the bitcoin as it deflates. There can't be a significant actual increase in value just from predictable factors.

To give an analogy, suppose everyone knew for a fact that gold would hit $2,500/oz in two years. What would happen to the price of gold today? The assumption that something will go way up in value in the future will cause it to go way up in value today, preventing the future rise because it will have already happened.

So then would it be necessary for there to be a standard of living decrease? Or would jobs just hire you way under what your currently worth to try and get you to stay around? Either way it still seems like a problem similar to inflationary economies, just in reverse.

[SgtSpike]

The biggest problem with deflation is debt accumulation. With deflation any debt is more expensive to pay off than the value of the goods originally obtained with said debt.

Since the deflation in bitcoins is predictable, a bitcoin's value today already includes the present value of holding the bitcoin as it deflates. There can't be a significant actual increase in value just from predictable factors.

To give an analogy, suppose everyone knew for a fact that gold would hit $2,500/oz in two years. What would happen to the price of gold today? The assumption that something will go way up in value in the future will cause it to go way up in value today, preventing the future rise because it will have already happened.

So then would it be necessary for there to be a standard of living decrease? Or would jobs just hire you way under what your currently worth to try and get you to stay around? Either way it still seems like a problem similar to inflationary economies, just in reverse.

It's not a problem though.  I don't know why you think employees deserve to be paid more than what their labor is worth.  They don't.

An adjustment of wages towards cost of living is meant to give the employee the exact value of their labor.  If the cost of living goes down, the employee's wages should go down according to a cost of living adjustment.

You can argue about it being a tough sell to employees all you want, but the reality is, if the employer had to reduce their wage due to a cost of living decrease, then other companies likely did the same, and jobs listed in the area for the same type of work would likely pay the same as the new wage rate.  Even if the employee didn't like it, there wouldn't be anyone else willing to pay them more.

[Brutus]

"This is the only problem that I can see in the Austrian way of thinking. And in fairness it seems like a much better problem then having your wage purchasing power stripped away from you every year through inflation. It just doesn't seem to promote longevity in the career of an employee.  "

Wow the OP raises a good question I had never considered re: a stable currency or a currency that experiences long term deflation like that which happened during the 1800s within the US.

But the inverse could be said to offer no job stability as an employee that was working within a market where salaries where appreciating rapidly, would most likely desire to leave his/her present job for higher pay given rising rates within a particular market.  This type of job shopping happened during the 90s within the tech boom.  Those that had been at a job for a long time where often being paid much less than newer people waking in the door.

In either case I believe this is remedied (as previously mentioned) by the employer and employee working out salary and job responsibilities on a contractual basis at set intervals.  

[NoodlesJefferson]

The biggest problem with deflation is debt accumulation. With deflation any debt is more expensive to pay off than the value of the goods originally obtained with said debt.

Since the deflation in bitcoins is predictable, a bitcoin's value today already includes the present value of holding the bitcoin as it deflates. There can't be a significant actual increase in value just from predictable factors.

To give an analogy, suppose everyone knew for a fact that gold would hit $2,500/oz in two years. What would happen to the price of gold today? The assumption that something will go way up in value in the future will cause it to go way up in value today, preventing the future rise because it will have already happened.

So then would it be necessary for there to be a standard of living decrease? Or would jobs just hire you way under what your currently worth to try and get you to stay around? Either way it still seems like a problem similar to inflationary economies, just in reverse.

It's not a problem though.  I don't know why you think employees deserve to be paid more than what their labor is worth.  They don't.

An adjustment of wages towards cost of living is meant to give the employee the exact value of their labor.  If the cost of living goes down, the employee's wages should go down according to a cost of living adjustment.

You can argue about it being a tough sell to employees all you want, but the reality is, if the employer had to reduce their wage due to a cost of living decrease, then other companies likely did the same, and jobs listed in the area for the same type of work would likely pay the same as the new wage rate.  Even if the employee didn't like it, there wouldn't be anyone else willing to pay them more.

I'm not arguing that it would be a tough sell, though I do think that's a PR problem when trying to sell this idea. I am asking if job stability would suffer in a deflationary economy. It sounds like most people are saying that job stability would suffer and that shouldn't matter. Or that people would get use to it job instability or live with pay decreases.  

[lame.duck]

If only it would be so easy, what assumption do you make about employment rate, the 'unique' value of that worker/ this employer as a working opportunity and so on.

[Brutus]

"I am asking if job stability would suffer in a deflationary economy."?

Since it is a very general question I'll venture a general answer.

No.

All things being equal "I" would have to assume that this economy was based on a stable and mature monetary system with no centrally controlled inflationary mechanism (btc of 2017).  Given that I believe that said economy would lead to a much higher level of predictability for participants over the long term.

So companies would figure out ways to keep valuable employees given your example of deflation at a steady and given percentage.  Some methods; Contracting on a yearly basis (with the ability to adjust terms with the new year's contract) is one method, contracting + profit sharing, exchanging ownership for lower wages (options). etc, etc, etc.

And as mentioned in another post if wages are going down across a given industry and job skill set, the employee is likely to take the lower/current market salary (at the present job) as the market overall will not offer his/her present salary (all other things being equal as well as the receptionist having specific unique skill sets).

[kjj]

The Austrian school of economics says that deflation seems to have a positive effect on everyone and I would tend to agree. Inflationary economics seems to really be bad all around except for the government and central banks. In a In Keynesian/inflationary economics Goods and services tend to go up in price while the wages employees are earning go down in value every year, thus the need for employers to give out standard for living increases. In a Austrian/deflationary economy there would be no need for a standard of living increase as the amount of money they were making on a yearly or hourly basis would increase in its purchasing power each year.

I think this is wrong.  Prosperity causes deflation.  Deflation does not cause prosperity.

A gain in productivity means that society gets more benefit for the effort expended, which is another way of saying that things cost less.