Wage Deflation

Definition

The term wage deflation refers to employee compensation that does not keep pace with inflation or decreases over time.  Wage deflation can occur during economic recessions; it may also be caused by technological advances that lower the value of labor.

Explanation

When an economy's growth slows down, the number of unemployed individuals typically increases.  As the ranks of the unemployed rise, there is a simultaneous increase in the competition for open jobs.  This over-supply of labor will oftentimes result in the lowering of wages, as out-of-work individuals desperately seek employment.  If the growth in wages does not keep pace with inflation, then wage deflation is said to occur.

In addition to poor economic conditions, wage deflation can also occur when jobs are displaced by technological advances that automate what were traditionally manually-performed tasks.  Once again, this competition with automation results in workers willing to accept lower wages to retain their jobs.  Employees may also find themselves in competition with domestic or overseas outsourcing solutions that may be cost-advantaged through economies of scale or lower regional wages.

Related Terms

cost-of-living adjustmentliving wage, base salary