David R. Henderson  

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With All Due Respect... Questions for DeLong...

Brad DeLong, in a belated comment at the end of my post, writes:

So is your argument really that if not for the stimulus package wages would be falling--and falling wages would be inducing employers to hire lots more workers?

That hasn't happened in the U.S. economy since 1921. In the U.S. economy since 1921, falling wages and prices have deepened depressions by multiplying bankruptcies. Deflation is really bad juju.

I confess I am surprised to see somebody calling for it, even here.


My answer to his first graf is no, my argument is more nuanced than that. Here's the relevant part of my post that answers DeLong:

If wages are not falling, then that well could be due to extension of unemployment benefits and some of the additional spending in the stimulus package. DeLong has arbitrarily chosen zero real-wage increase as his baseline. But in a readjustment, what Arnold Kling calls a recalculation, there's a case to be made for some real wages to fall. At those lower real wages, some of the currently unemployed would be employed.
His second graf is incorrect. In the 1981-82 recession, the fall in real wages helped end the recession.

In response to his surprise, he might want to read Bryan's post in July 2009 that made a similar argument. So I'm not sure why he's surprised.


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CATEGORIES: Fiscal Policy



COMMENTS (15 to date)
Contemplationist writes:

This is the essential dishonesty of Keynesians. The best insight they came up with is that of sticky wages. So naturally helping wages become more flexible is the answer, right? Nooo! That does not use big government enuf!

[Comment edited for overuse of upper case.--Econlib Ed.]

q writes:

> In the 1981-82 recession, the fall in real wages helped end the recession.

what was the inflation rate in that year, compared to 2009-10?

did nominal wages fall?

Vangel writes:

[Comment removed pending confirmation of email address and for rudeness. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Eric Rall writes:

DeLong's also equating falling nominal wages with deflation, ignoring the possiblity that a fall in real wages can produce a fall in nominal wages even if general price levels are stable or increasing.

Doc Merlin writes:

Hrm, in both of those recessions the size of government shrunk, iirc.

Tom Dougherty writes:

Minzie Chinn blogs (responding to David Henderson) that he doesn't see the decline in the real wage. I replied with the following:

Labor's Share is the real wage adjusted for changes in productivity. The recession began in the 3rd quarter of 1981. As you can see from the data below, the adjusted real wage is increasing leading up to the recession and peaks in the middle of the recession reaching 105.084 in the first quarter of 1982. The adjusted real wage declines in the subsequent quarters, declining to 103.977 as the recession ends in the 4th quarter of 1982. The adjusted real wage declines further in 1983 and 1984 with the beginning of the Reagan boom. You're right. Henderson should have referred to the adjusted real wage not the real wage.

Major Sector Productivity and Costs Index

Series Id: PRS85006173Duration: index, 1992 = 100Measure: Labor ShareSector: Nonfarm Business

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1981 101.862 102.935 102.137 103.112 102.515
1982 105.084 104.505 104.641 103.977 104.543
1983 103.222 101.359 99.971 99.971 101.081
1984 100.600 100.056 100.182 100.291 100.282

Richard A. writes:

"In the U.S. economy since 1921, falling wages and prices have deepened depressions by multiplying bankruptcies. Deflation is really bad juju."

It's not falling prices that cause recessions but falling nominal GDP. How do you avoid a recession? Don't let the growth rate of GPPn decline. It's the failure of price and wage growth rates to decline in sinc with declining GDPn that causes recessions.

GDPn = P x GDPr

If GDPn declines by 1/2, then P is going to have to decline by 1/2 in order to prevent a decline in GDPr. In the real world, P will be slow to change causing a drop in GDPr. If government intervenes to slow adjustment in P and/or W, it will prolong the recession.

spencer writes:

OK, so you have changed your argument that it is not wage cuts, but real wage cuts that end recessions.

And, yes you are right that real wages fell in the 1982 recovery. So you have one example of your theory.

But what about the other eleven post WW II recoveries. In all those recoveries real wages rose. So you claim your theory is correct if you count this one exception and ignore the other eleven times that it was incorrect.

One time out of twelve really proves your theory,
doesn't it.

Tom Dougherty writes:

Spencer,

The 1973 recession begins in the 4th quarter and ends in the 1st quarter of 1975. The adjusted real wage (Labor's Share) increases leading up to the beginning of the recession in 1973. Peaks in the 3rd quarter of 1974, falls as the recession comes to an end in the 1st quarter of 1975. It continues it fall through 1975 and 1976 as the recovery begins.

Major Sector Productivity and Costs Index

Series Id: PRS85006173Duration: index, 1992 = 100Measure: Labor ShareSector: Nonfarm Business

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1972 102.631 101.476 101.671 102.322 102.026
1973 102.105 102.459 104.096 104.594 103.332
1974 104.999 104.234 105.106 103.664 104.487
1975 102.371 101.215 100.255 100.579 101.079
1976 100.155 100.201 100.826 100.900 100.529

Tom Dougherty writes:

Spencer,

The 1969 recession begins in the 4th quarter of 1969 and ends in the 4th quarter of 1970. The adjusted real wage increases leading up to the beeginning of the recession in 4Q 1969 (104.757) and peaks in the 1Q of 1970 (105.251). After the peak, the adjusted real wage begins it decline with a temporary respite at the end of the recession in the 4Q 1970 before it continued drop during the recovery in 1971 (102.131 annual avg) and 1972 (102.026 annual avg).

Major Sector Productivity and Costs Index

Series Id: PRS85006173Duration: index, 1992 = 100Measure: Labor ShareSector: Nonfarm Business

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1968 100.499 100.115 101.191 101.990 100.961
1969 101.286 102.603 103.337 104.757 103.014
1970 105.251 103.850 103.504 104.021 104.149
1971 102.026 102.029 101.607 102.849 102.131
1972 102.631 101.476 101.671 102.322 102.026

Tom Dougherty writes:

Spencer,

The 1960 recession begins in the 2Q and ends in the 1Q of 1961. The adjusted real wage increases going in to the 1960 recession peaks in the 4th quarter of 1960 and declines as the recession is ending in the 1Q of 1961. The adjusted real wage continues its decline during the recovery.

Major Sector Productivity and Costs Index

Series Id: PRS85006173Duration: index, 1992 = 100Measure: Labor ShareSector: Nonfarm Business

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1959 102.880 102.469 102.967 103.632 102.988
1960 103.283 105.098 105.045 106.527 104.975
1961 106.074 104.384 103.664 103.369 104.350
1962 102.812 103.281 102.535 102.736 102.843

Tom Dougherty writes:

Spencer,

The 1953 recession begins in the 2Q and end in the 2Q of 1954. The adjusted real wage increases leading up to the recession in the 2Q of 1953. It peaks in the 1Q of 1954 before beginning its decline as the recession ends in the 2Q of 1954. The adjusted real wage continues its decline during the expansion.

Major Sector Productivity and Costs Index

Series Id: PRS85006173Duration: index, 1992 = 100Measure: Labor ShareSector: Nonfarm Business

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1952 100.615 101.569 101.884 101.685 101.444
1953 101.937 102.400 102.701 103.876 102.724
1954 104.259 103.504 102.595 101.976 103.069
1955 100.331 100.694 100.562 101.214 100.708

Tom Dougherty writes:

The adjusted real wage doesn't explain every recession, but I don't think there is ever one causal factor that explains everything. And I know how lefties work, they have endless objections to the functioning of the market. You explain one thing and it "Yeah, you explained that but what about this." You explain a second thing and its, "OK, but what about this." On and on it goes. I don't know why I even bother responding.

spencer writes:

Tom Dougherty -- the issue was real wages or compensation in recoveries when employment is expanding.

You missed the point by citing falling wages in recessions when employment was falling.


Double check your argument and cite the correct data.

But thanks for pointing out that in recessions real wages and employment move in the same direction, just the opposite of the theory you are defending.

Tom Dougherty writes:

Spencer,

You have failed to grasp anything that anyone has been saying. Dave Henderson wrote, "In the 1981-82 recession, the fall in real wages helped end the recession."

I would only modify Dave's statement by substitution the adjusted real wage for real wage in the quote above. In all of the data cited above, the falling adjusted real wage helped end each recession.

And get this, the adjusted real wage continues to fall from its recession highs as the economy recovers and employment picks up. So, totally contrary to what you say there is a positive relationship is between falling adjusted real wages and increased employment.

I am not sure if you are deliberately trying to be misleading or you really cannot grasp what is going on.

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