Krugman: Wage cuts could lead to unemployment

The temptation to cut wages in a downturn might save jobs at an individual company, but when everyone starts doing it unemployment is likely to rise, economist Paul Krugman argues in the New York Times. Further, he says shrinking incomes act as an anchor on an already slow moving economy, since our bills won't drop to keep up with our lower wages.

Krugman writes:

Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

My question, does this argument hold true for individual sectors in the economy... say, newspapers? If every major newspaper publisher cuts wages, does that negate the benefit to individual companies?

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