Reporter Dan Browning’s piece on coming newsroom cuts at the St. Paul Pioneer-Press contains a curious detail that perhaps will encourage rigorous thinking in articles covering compensation.

“The company said it wants… the elimination of merit pay….” Browning wrote, paraphrasing Guild officer Dave Orrick.

The term “merit pay” usually means that management rewards superior performance with superior compensation. It is the theory behind all those executive compensation schemes which mountains of empirical evidence shows are often anything but, with executives seeing their compensation soar even as stock prices collapse.

That is perhaps best exemplified by the experience of John Snow, whose pay soared, even as he ran CSX shares down, before leaving the railroad to become Treasury secretary in 2003. Later, he ran the firm that owns Chrysler and IAP Worldwide (supplier of the ice that never got to New Orleans and rebuilder of the mold-infested lodgings at Walter Reed Army Medical Center).

There is an adage among business owners—one long absent from news reports—that properly priced labor pays for itself. Workers whose pay equals their economic value-added receive just what they contribute and, in effect, cost the employer nothing. Those who are underpaid, however, damage profits through inefficiency, because when you underpay you attract less efficient workers. On the other end, those like Snow who are overpaid rob the owners of part of their profits.

So what does it say that Pioneer Press owner Dean Singleton, assuming this morning’s article is accurate, wants to stop rewarding superior performance with appropriately superior pay?

In theory, the best workers will go elsewhere. After all, the highest performers will be in demand and others will bid for their talent. The theory of market economics says that the market will punish Singleton and MediaNews for violating a principle of competitive market economics. Over time the quality of the labor he buys will diminish, with appropriate damage to his equity.

But the real world is not an economic textbook, however much journalists who never cracked one portray it to be. To those who write about economics, it would be good to read up on the much studied Theory of the Second Best, which has been around for more than a half century, but rarely informs news reports and commentaries.

In reality, stopping merit pay may not result in the market punishing the owners, assuming the merit pay was proportional to merit. Just the costs of selling a house, moving household furniture, and the disruption to family works against departure for all but executives, who usually get such costs covered along with a so-called gross up for taxes.

For anyone making the roughly $80,000 all-in average compensation of PiPress journalists, the costs of moving are inhibiting, the reality of family is inhibiting, and the risks of a new job not working out are daunting since, unlike senior executives, their new jobs rarely come with guarantees if things do not work out.

Because of high transaction costs and high risks, some of the best PiPress journalists will stay in place, choosing getting stiffed over attempting to maximize the value of their labor.

But there is another factor at work, one that has hit many millions of other workers for decades and is now beginning to strike newsrooms. It is a trend that hardly anyone but Louis Uchitelle has covered in a sustained way, one of the great stories that are remaking America, but that are ignored in favor of glitz-mongering and Washington-to-Wall Street transcription posing as journalism: It is the health of labor markets.

If there are no other reporting, editing, graphic and photography jobs to be had, then PiPress management can eliminate merit pay without regard to the competitive labor market. Competitive markets matter only if they exist. If they are rigged (as with executive pay) or sick (as with journalism, auto making, steel and aluminum, widget making, college teaching, etc.) then the virtuous self-reinforcing benefit of competitive markets is replaced by the viciousness of raw economic power. This picture is not pure black and white, but it is surely a darkening shade of gray.

In journalism right now the labor market is so enfeebled as to barely exist. At least 15,500 journalism jobs were lost last year alone, according to Erica Smith of the St. Louis Post-Dispatch. And the pace of job losses is quickening, with nearly 10,000 lost in the first four and a half months of 2009.

David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ.