Deflation: Wage rates and the employee VS the Employer

[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.

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.  

Ah, ok.

Even still, job stability would NOT suffer.

If I hire you for picking cherries at $20/hr, and a year down the road, the same cherry picking job is only worth $18/hr, and you think, "Oh, that sucks they are only going to pay me $18/hr now, I'm going to go look for someplace that is still paying $20/hr."  Well, you're not going to find it.  That's because, for picking cherries, the going market wage is now $18.  Every company that is looking for cherry pickers is now paying $18, even if they were paying $20 a year earlier.

So no, job stability would not suffer.  All companies would adjust to deflation in their hiring wage rates, just the same as all companies currently adjust to inflation in their hiring wage rates.

[cvk]

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

I'm not sure how much sense this makes, but here's a stab at it. I will use "price decrease" to mean what OP means by "deflation" because the term "deflation" seems confusingly like the opposite of inflation (an increase in the quantity of money), even though it is typically used to mean a decrease in prices.

If price decrease inversely follows the increase in productivity of all the producers in the economy, then the average producer's continuous increase in productivity will balance the effect of continuous price decrease. Above-average producers will still deserve a raise, and below-average producers will still deserve a pay cut.

In other words, a fixed salary will buy more and more each year, but the average worker will deserve this "raise" because he will increase his productivity each year.

Of course, this makes the assumption that price decrease tracks the increase in productivity of all producers in the economy, an effect which might be dwarfed by other effects, as is the case when a currency is in its infancy and is experiencing price decrease because the currency is rapidly attracting new users.

[speeder]

And what you do with the psychological effect?

I mean, someone people will look back and say:

"Oh the good times, back in 2010, when I got 10.000 BTC for selling Pizza. Now I am getting this crap paltry 0,000001 BTC"

Even if 10.000 BTC was valued 15 USD and now 0,000001 is 30 USD

[kjj]

And what you do with the psychological effect?

I mean, someone people will look back and say:

"Oh the good times, back in 2010, when I got 10.000 BTC for selling Pizza. Now I am getting this crap paltry 0,000001 BTC"

Even if 10.000 BTC was valued 15 USD and now 0,000001 is 30 USD

The psychological effect is overblown, particularly when the change is gradual.  Observe inflation over the last 5/10/30/100 years.  Wasn't the end of the world.  Won't be the end of the world going in the other direction either.

[SgtSpike]

And what you do with the psychological effect?

I mean, someone people will look back and say:

"Oh the good times, back in 2010, when I got 10.000 BTC for selling Pizza. Now I am getting this crap paltry 0,000001 BTC"

Even if 10.000 BTC was valued 15 USD and now 0,000001 is 30 USD

The same could be said of inflation.

"Oh the good times, back in 2010, when I got a whole candy bar for $1.  Now I have to pay $100,000 for one."

[JoelKatz]

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.

They wouldn't be living with pay decreases. If I pay one week with 50 one dollar bills and the next day with one 50 dollar bill, has your pay decreased because you received fewer dollars?

There is no reason job stability would suffer. You can make the same argument in an inflationary economy and it's equally wrong. Here it goes: "Suppose I get a job for $55,000 per year. Two years later, due to inflation, I'm not being paid enough. So unless my boss is willing to raise my salary, I'll take a new job for a higher wage. So job stability will suffer due to inflation." But we all know that's not right. Both participants have an incentive to restore the wage to market value.

[NoodlesJefferson]

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.

They wouldn't be living with pay decreases. If I pay one week with 50 one dollar bills and the next day with one 50 dollar bill, has your pay decreased because you received fewer dollars?

There is no reason job stability would suffer. You can make the same argument in an inflationary economy and it's equally wrong. Here it goes: "Suppose I get a job for $55,000 per year. Two years later, due to inflation, I'm not being paid enough. So unless my boss is willing to raise my salary, I'll take a new job for a higher wage. So job stability will suffer due to inflation." But we all know that's not right. Both participants have an incentive to restore the wage to market value.

Your right, 2 years later $55,000 wouldn't be as much. So it has become very common place to have standard of living adjustments while working at companies currently.

And I don't think you are understanding what I am saying. In order to combat deflation companies would either need to adjust your pay, (pay you less every year) or fire you and hire someone new for less money. If you read my original question I give the example of, if someone pays you 10 bucks an hour and inflation hits at 10% a year. Why, in 10 years time, wouldn't your employer fire you and hire 10 other people at 1 dollar an hour? The only other option for the employer that I can think of is it would be common place to pass out a standard of living adjustment and pay you less every year. That or labor would start to get underpaid in order to counter act deflation and keep employees. Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse. 

[kjj]

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.

They wouldn't be living with pay decreases. If I pay one week with 50 one dollar bills and the next day with one 50 dollar bill, has your pay decreased because you received fewer dollars?

There is no reason job stability would suffer. You can make the same argument in an inflationary economy and it's equally wrong. Here it goes: "Suppose I get a job for $55,000 per year. Two years later, due to inflation, I'm not being paid enough. So unless my boss is willing to raise my salary, I'll take a new job for a higher wage. So job stability will suffer due to inflation." But we all know that's not right. Both participants have an incentive to restore the wage to market value.

Your right, 2 years later $55,000 wouldn't be as much. So it has become very common place to have standard of living adjustments while working at companies currently.

And I don't think you are understanding what I am saying. In order to combat deflation companies would either need to adjust your pay, (pay you less every year) or fire you and hire someone new for less money. If you read my original question I give the example of, if someone pays you 10 bucks an hour and inflation hits at 10% a year. Why, in 10 years time, wouldn't your employer fire you and hire 10 other people at 1 dollar an hour? The only other option for the employer that I can think of is it would be common place to pass out a standard of living adjustment and pay you less every year. That or labor would start to get underpaid in order to counter act deflation and keep employees. Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse. 

Why do you think that standard of living adjustments can only go in one direction?

[NoodlesJefferson]

Why do you think that standard of living adjustments can only go in one direction?

I don't. I think they could go either way.

[indio007]

This a funny thread considering you are all using fiat money in a single payor financial system.

[JoelKatz]

And I don't think you are understanding what I am saying. In order to combat deflation companies would either need to adjust your pay, (pay you less every year) or fire you and hire someone new for less money.

Right. If you're rational, they'll do the former. If you're irrational, they'll do the latter. It is the same as inflation but in reverse. An irrational employer who refuses to raise wages to combat inflation will lose employees. A rational one will raise wages.

If you read my original question I give the example of, if someone pays you 10 bucks an hour and inflation hits at 10% a year. Why, in 10 years time, wouldn't your employer fire you and hire 10 other people at 1 dollar an hour?

Because he couldn't afford to. If he can't afford to hire 10 employees at market rates today, why would you think he would magically be able and willing to do so in 10 years?

The only other option for the employer that I can think of is it would be common place to pass out a standard of living adjustment and pay you less every year. That or labor would start to get underpaid in order to counter act deflation and keep employees. Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse.

It's precisely the same problem, which is why it's no problem at all. You can make the same argument about inflation -- employees constantly demanding raises will piss off employers and hurt employment longevity and job stability. But that's obviously not true. It really makes no difference.

[SgtSpike]

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.

They wouldn't be living with pay decreases. If I pay one week with 50 one dollar bills and the next day with one 50 dollar bill, has your pay decreased because you received fewer dollars?

There is no reason job stability would suffer. You can make the same argument in an inflationary economy and it's equally wrong. Here it goes: "Suppose I get a job for $55,000 per year. Two years later, due to inflation, I'm not being paid enough. So unless my boss is willing to raise my salary, I'll take a new job for a higher wage. So job stability will suffer due to inflation." But we all know that's not right. Both participants have an incentive to restore the wage to market value.

Your right, 2 years later $55,000 wouldn't be as much. So it has become very common place to have standard of living adjustments while working at companies currently.

And I don't think you are understanding what I am saying. In order to combat deflation companies would either need to adjust your pay, (pay you less every year) or fire you and hire someone new for less money. If you read my original question I give the example of, if someone pays you 10 bucks an hour and inflation hits at 10% a year. Why, in 10 years time, wouldn't your employer fire you and hire 10 other people at 1 dollar an hour? The only other option for the employer that I can think of is it would be common place to pass out a standard of living adjustment and pay you less every year. That or labor would start to get underpaid in order to counter act deflation and keep employees. Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse. 

That is exactly what they would do.  Why do you think they would do things differently?

[cvk]

Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse. 

I don't know if I did a good job explaining this clearly. Let me restate.

If decreasing prices (deflation) are caused by increasing productivity, then the average worker will deserve the increasing purchasing power his fixed salary provides, and he will never need an actual raise or a pay cut (as long as he remains exactly average).

[JoelKatz]

If decreasing prices (deflation) are caused by increasing productivity, then the average worker will deserve the increasing purchasing power his fixed salary provides, and he will never need an actual raise or a pay cut (as long as he remains exactly average).

Right, but the real question here is what happens if deflation is caused by scarcity of currency occurring at a rate that's likely to exceed any increase in real value elsewhere. And the answer is, so long as this deflation isn't terribly unpredictable, nothing much will happen.

[cvk]

If decreasing prices (deflation) are caused by increasing productivity, then the average worker will deserve the increasing purchasing power his fixed salary provides, and he will never need an actual raise or a pay cut (as long as he remains exactly average).

Right, but the real question here is what happens if deflation is caused by scarcity of currency occurring at a rate that's likely to exceed any increase in real value elsewhere. And the answer is, so long as this deflation isn't terribly unpredictable, nothing much will happen.

I agree with you, JoelKatz. In a Bitcoin economy where continuously increasing demand drives up the value of bitcoins, general price decrease (deflation) won't have a negative effect on employment. At worst, employers and employees will occasionally renegotiate their contracts.

I think OP's real question was more general:

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

Yes. In general, job stability will not be negatively affected in an "Austrian/deflationary" economy.

[SgtSpike]

Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse. 

I don't know if I did a good job explaining this clearly. Let me restate.

If decreasing prices (deflation) are caused by increasing productivity, then the average worker will deserve the increasing purchasing power his fixed salary provides, and he will never need an actual raise or a pay cut (as long as he remains exactly average).

But decreasing prices would also be caused by other factors in a bitcoin society, such as population growth (fewer coins per capita).

[NoodlesJefferson]

If you read my original question I give the example of, if someone pays you 10 bucks an hour and inflation hits at 10% a year. Why, in 10 years time, wouldn't your employer fire you and hire 10 other people at 1 dollar an hour?

Because he couldn't afford to. If he can't afford to hire 10 employees at market rates today, why would you think he would magically be able and willing to do so in 10 years?

The only other option for the employer that I can think of is it would be common place to pass out a standard of living adjustment and pay you less every year. That or labor would start to get underpaid in order to counter act deflation and keep employees. Either way it doesn't promote employment longevity and job stability. It seems to be the same problem as inflation just in reverse.

It's precisely the same problem, which is why it's no problem at all. You can make the same argument about inflation -- employees constantly demanding raises will piss off employers and hurt employment longevity and job stability. But that's obviously not true. It really makes no difference.

Because firing the employee hired ten years prior frees up 10 bucks an hour for the employer to now spend. Whether or not he chooses to spend that on hiring 10 new employees or hiring 1 new employee at 1$ an hour to replace the previous and pocketing the extra 9 bucks doesn't matter. Its that in 10 years the 1st employee is now too expensive and can be replaced by cheaper labor.

And regardless if it is the same problem or reverse problem or not I don't care. I'm not arguing that, I'm not arguing anything.

However, my question is does an Austrian school economy hurt job stability? Seems like most people in here say it will hurt it more so than in an inflationary economy. Or cause employers to pay out lower wages then what the employee time is worth in anticipation of deflation. The burden of employment longevity seems to be on the employee rather than the company in a deflationary economy. And the only way around this seems to be cost of living adjustment where a company would pay you less every year to make up for deflation.

[NoodlesJefferson]

I don't think contracts promote career longevity. If your employees contract is up every year if gives your employee the chance to look for other jobs.
 
And given my example I think my question was very specific. Deflation will cause you to get over paid for a job over time, making it enticing for an employer to fire you and hire someone else on for a lower price. 

[SgtSpike]

I don't think contracts promote career longevity. If your employees contract is up every year if gives your employee the chance to look for other jobs.
 
And given my example I think my question was very specific. Deflation will cause you to get over paid for a job over time, making it enticing for an employer to fire you and hire someone else on for a lower price. 

No, it would make it enticing for an employer to lower your wage.

[TierNolan]

No, it would make it enticing for an employer to lower your wage.

If bitcoins increased in value by say 10% a year, then that would likely be directly added to the employee's contract.

We pay you X, decreasing at 10% per year.  A raise would be where they don't drop it.