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2021 | OriginalPaper | Chapter

3. Inconvenient Truths

Author : Liviu Voinea

Published in: Defensive Expectations

Publisher: Springer International Publishing

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Abstract

The previous chapter introduced three new theoretical concepts: defensive expectations, compensatory savings and the cumulative wage gap. This chapter presents the empirical evidence behind these ideas. First, it shows that downward wage flexibility is frequent. Both real and nominal wages can be cut—and they are, quite frequently and to a significant extent. Second, lower wages are translated into lower consumption even in the absence of liquidity constraints. Third, a wage cut leads to lower consumption and higher savings. Data from the last four recessions in the US confirms that savings increase when income falls. The saving behavior in a recession is counter-cyclical, while the consumer behavior is pro-cyclical.

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previous chapter An Alternative Theoretical Framework for Consumption and Saving

next chapter The Cumulative Wage Gap and the Phillips Curve

See, among others, Smith (1976), Gunderson (1979), Borjas (2002), Voinea and Mihaescu (2012).

For various analysis of the minimum wage impact on the private sector, see Brown, Gilroy, and Kohen (1982), Deere, Murphy, and Welch (1995), Neri, Gonzaga, and Camargo (2000), Maloney et al. (2001), Neumark et al. (2013), Heemskerk, Voinea, and Cojocaru (2018).

The lost decade refers to the 1990s when Japan had persistent slow growth and low inflation. Between 1991 and 1999, the real GDP per capita grew by a mere 1.1 percent annually (Maddison database 2018). Data shows that there were actually two lost decades: between 2000 and 2009, the real GDP per capita grew by a cumulated 1.5 percent (meaning 0.16 annually). The euro-area massive quantitative easing after the global financial crisis was motivated by the attempt to avoid the Japanese model of a long-standing deflationary episode of low growth. After 2010, Japan itself embarked on an unprecedented quantitative easing effort with some results—as real growth rates started to increase.

The German reforms were called the “Hartz reforms” by the name of the President of the Governmental Committee charged with designing them, Peter Hartz. Ironically, Hartz, who proposed reforms that benefitted the large private companies, was at that time the Human Resources Director of a big car manufacturer. He was later convicted, receiving a suspended sentence, for illegal payments through bogus companies to other members of the company’s works’ council and improper use of the company’s money (according to international media reports—Deutsche Welle, The Guardian, Wall Street Journal and New York Times).

A reservation wage is the lowest wage which would be accepted by a worker.

See, for example, Dickens et al. (2007); Messina et al. (2010); Grigsby, Hurst, and Yildirmaz (2018).

Park and Shin (2017).

Based on data for the US Bureau of the Census Displaced Workers Surveys.

For a broad analysis of austerity, see Ban (2016). For an analysis of the austerity policies in Romania, see Voinea (2013).

In Romania, 80 percent of the minimum wage employees work in the private sector.

All data are according to Forni and Novta (2014).

All data based on Perez et al. (2016).

De Magalhaes et al. (2019).

Benito and Mumtaz (2006).

Grant (2007).

Kennickell and Lusardi (2004).

See, among others, Campbell and Mankiw (1989), Vihriala (2017).

According to De Nardi, French, and Benson (2011).

According to Petev and Pistaferri (2012).

According to De Nardi, French, and Benson (2011).

According to ECB (2020).

According to O’Connell, O’Toole, and Znuderl (2013).

Tokuoka (2010) and Vihriala (2017).

Dynan (2009a, b).

Dynan (2012).

Sovereign bonds are, of course, not risk free as countries can default. However, the risk weights are zero in the risk-weighted matrix for the best-rated sovereigns (in the international banking regulations), and in general, they are seen as being less risky than any other assets.

See Ozturk and Sheng (2017).

Baker, Bloom, and Davis (2016).

Mody et al. 2012.

Idem.

Data regarding the US current account balance was retrieved from the website of the BEA.

Data regarding the current account balance and savings rate of OECD countries was retrieved from the website of the OECD.

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Title: Inconvenient Truths
Author: Liviu Voinea
Publisher: Springer International Publishing
Book: Defensive Expectations
Print ISBN: 978-3-030-55044-8

Electronic ISBN: 978-3-030-55045-5

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-55045-5_3