Sticky salaries and wages
The constant real value non–monetary items salaries and wages are generally sticky downwards: it is not easy for firms to reduce them in nominal value. It is, of course, very, very easy to reduce their real values during inflation: just keep them the same or increase them at a rate lower than the inflation rate. People are apparently agreeble to accept the latter option which means a reduction in real value. People are very unhappy to accept a reduction in nominal value of salaries and wages.
It may happen that it could be some time before the concept of enhanced economic stability during deflation via financial capital maintenance in units of constant purchasing power (CIPPA) is generally accepted. Salaries and wages would then be automatically decreased in nominal value by means of measurement in units of constant purchasing power while their real values would stay the same during deflation. This would improve economic stability substantially and help central banks in their task of getting the economy into a low inflationary mode again. It would also reduce the level of the monetary effect of a lower general price level during deflation.
Salaries and wages are already being decreased in nominal value in the labour market during deflation, but, not yet automatically as a normal accounting practice by measuring them in units of constant purchasing power in terms of the negative change in the CPI.
A possible practical way of overcoming the opposition people have in accepting a decrease in salaries and wages during months of negative monthly inflation while the annual inflation rate is still positive (during inflation and disinflation) would be the following:
Employment contracts could state that salaries and wages would be updated (there is no stable measuring unit assumption under IFRS-authorized financial capital maintenance in units of constant purchasing power - CIPPA) in terms of the Daily Index while the DI value is increasing. When it decreases as a result of a period of negative monthly inflation while the annual inflation rate is still positive, salaries and wages would be kept fixed in nominal value during that period in order to give employees certainty as to the amount of money they will receive at month end. They would, of course, be receiving more in real value during the period their salaries and wages are fixed with a decreasing DI. As soon as the Daily Index turns positive again salaries and wages will be updated again in terms of the increasing DI, but, only after allowing a recoupment of the period of the decrease in the DI while annual inflation was still positive. Thus, their salaries and wages would be kept fixed for a little longer while the DI is already increasing. They would, of course, be receiving less in real value during the period their salaries and wages are fixed with an increasing DI. Months of negative monthly inflation during a year of positive annual inflation are normally limited to one or two consecutive months. The net effect to salaries would be the same as always updating them in terms of the DI whether it was increasing or decreasing during continuous annual inflation and disinflation. Neither employers nor employees would be negatively affected in the above case.
During deflation a different approach is required because keeping salaries fixed in nominal value during deflation means their real values are increasing daily and may after some time severely affect entities´ ability to maintain stability in their operations during deflation which may result in layoffs affecting employees in the worst way. On the other hand, employees need certainty about how much money they will receive during the current year in their contracts also during deflation.
Employment contracts could state that during deflation salaries and wages would be kept fixed during the contract year in which the economy first enters into deflation. Contracts could then be agreed to be renegotiated at the end of that contract year and yearly thereafter while the economy remains in deflation with a view to decreasing the nominal values of salaries and wages (not their real values) in a predictable manner in line with deflation. Their real values would remain the same or increases in real terms could be negotiated. It could then also be negotiated to increase salaries and wages in real terms by keeping them fixed during deflation depending on each entities´ specific circumstances.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Showing posts with label Sticky salaries and wages. Show all posts
Showing posts with label Sticky salaries and wages. Show all posts
Tuesday, 9 August 2011
Friday, 18 December 2009
Sticky salaries and wages
The constant real value non-monetary items salaries and wages are generally sticky downwards: it is not easy for firms to reduce them in nominal value.
It is, of course, very easy to reduce their real values during inflation: just keep them the same or increase them at a rate lower than the inflation rate.
It may happen that it could be some time before the concept of enhanced economic stability during deflation via financial capital maintenance in units of constant purchasing power is generally accepted.
Salaries and wages would then be automatically decreased in nominal value by means of measurement in units of constant purchasing power while their real values would stay the same during deflation. This would improve economic stability substantially and help central banks in their task of getting the economy into a low inflationary mode again. It would also reduce the level of the monetary effect of lower prices during deflation.
Salaries and wages are already being decreased in nominal value in the labour market during deflation, but, not yet by measuring them in units of constant purchasing power in terms of the negative change in the CPI.
There is a lot to be learned about how financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) as an alternative to the real value destroying traditional Historical Cost Accounting model would enhance general economic stability substantially during both low inflation and deflation. It would remove a great part of the distortion in the economy caused by SA accountants´ choice to implement their very destructive stable measuring unit assumption.
This is besides maintaining about R200 billion per annum in the SA constant item economy unnecessarily, unknowingly and unintentionally currently being destroyed by SA accountants´ choice of the stable measuring unit assumption during low inflation.
SA accountants mistakenly blame their unnecessary, unknowing and unintentional destruction of the real value of companies´ capital and profits on inflation since they do not value and account it the same way they do not value and account the net monetary gain or loss from holding monetary items during low inflation and deflation although this can be done according to Kapnick.
SA accountants can not stop the destruction of real value of monetary items in the SA monetary economy. The SARB with its monetary policy and the government with its economic policies have to reduce inflation which would reduce the amount of real value destruction in the monetary economy. The late Milton Friedman so famously stated "Inflation is always and everywhere a monetary phenomenon." Inflation can only destroy the real value of the Rand and other monetary items in the SA monetary economy - nothing else. Inflation has no effect on the real value of non-monetary items
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants can easily stop their about R200 billion annual destruction of the profits and capital of SA banks and companies and its negative effect on economic growth and employment during low inflation.
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as the IASB authorized them 20 years ago, they would value and account the cost of inflation during low inflation as they are already required (forced) to do during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies. They would also maintain about R200 billion in SA banks´ and companies´ existing profits and capital by not unknowingly destroying that amount each and every year as they are unknowingly doing right now in existing reported constant items, e.g. all reported Retained Profits in all SA banks and companies, never maintained in the SA non-monetary or real economy with their very destructive stable measuring unit assumption during low inflation. This would have a positive impact on economic growth and employment for an unlimited period of time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
It is, of course, very easy to reduce their real values during inflation: just keep them the same or increase them at a rate lower than the inflation rate.
It may happen that it could be some time before the concept of enhanced economic stability during deflation via financial capital maintenance in units of constant purchasing power is generally accepted.
Salaries and wages would then be automatically decreased in nominal value by means of measurement in units of constant purchasing power while their real values would stay the same during deflation. This would improve economic stability substantially and help central banks in their task of getting the economy into a low inflationary mode again. It would also reduce the level of the monetary effect of lower prices during deflation.
Salaries and wages are already being decreased in nominal value in the labour market during deflation, but, not yet by measuring them in units of constant purchasing power in terms of the negative change in the CPI.
There is a lot to be learned about how financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) as an alternative to the real value destroying traditional Historical Cost Accounting model would enhance general economic stability substantially during both low inflation and deflation. It would remove a great part of the distortion in the economy caused by SA accountants´ choice to implement their very destructive stable measuring unit assumption.
This is besides maintaining about R200 billion per annum in the SA constant item economy unnecessarily, unknowingly and unintentionally currently being destroyed by SA accountants´ choice of the stable measuring unit assumption during low inflation.
SA accountants mistakenly blame their unnecessary, unknowing and unintentional destruction of the real value of companies´ capital and profits on inflation since they do not value and account it the same way they do not value and account the net monetary gain or loss from holding monetary items during low inflation and deflation although this can be done according to Kapnick.
SA accountants can not stop the destruction of real value of monetary items in the SA monetary economy. The SARB with its monetary policy and the government with its economic policies have to reduce inflation which would reduce the amount of real value destruction in the monetary economy. The late Milton Friedman so famously stated "Inflation is always and everywhere a monetary phenomenon." Inflation can only destroy the real value of the Rand and other monetary items in the SA monetary economy - nothing else. Inflation has no effect on the real value of non-monetary items
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants can easily stop their about R200 billion annual destruction of the profits and capital of SA banks and companies and its negative effect on economic growth and employment during low inflation.
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as the IASB authorized them 20 years ago, they would value and account the cost of inflation during low inflation as they are already required (forced) to do during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies. They would also maintain about R200 billion in SA banks´ and companies´ existing profits and capital by not unknowingly destroying that amount each and every year as they are unknowingly doing right now in existing reported constant items, e.g. all reported Retained Profits in all SA banks and companies, never maintained in the SA non-monetary or real economy with their very destructive stable measuring unit assumption during low inflation. This would have a positive impact on economic growth and employment for an unlimited period of time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
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