Bryan Caplan  

Tyler on Wage Stickiness: A Quick Note

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While I was away in Atlanta, Tyler asked, "How sticky are wages today?"  His doubts:

Keep in mind that unemployment rates today are disproportionately concentrated in low-income and low-education workers.  Haven't we been told, for years, that these same individuals are seeing some mix of stagnant and eroding wages?  That they are experiencing downward mobility?  That the real value of health care benefits has been falling and that more and more jobs don't offer health care benefits at all? 

Doesn't that mean...um...their wages aren't so sticky downwards?  And thus Keynesian economics is not the final story?

The obvious responses:

1. The erosion we've been told about for years is supposed to have taken years to happen.  Three or four decades, actually.  Even staunch Keynesians probably think that the labor market could right itself over such a long timespan.

2. This erosion took place alongside positive inflation, year after year.  It's perfectly consistent with complete nominal rigidity.  Consider: Between January 1978 and January 2008, the CPI (set to equal 100 for 1982-4) rose from 62.5 to 211.1 - enough to reduce constant nominal wages by over 75% in real terms.  Tyler mentions the real-nominal stickiness distinction later in the post, but it doesn't enter into his analysis.

Overall, I think Tyler's completely wrong here.  Ticker-tape flexibility in the labor market wouldn't solve all our economic problems overnight, but would quickly solve the unemployment problem.  And in terms of the human cost - not to mention the political economy of crisis - unemployment is problem Numero Uno to solve.  Instead of questioning the critical importance of flexible wages, free-market advocates should be pointing out the many government policies that make wages stickier.  Government isn't the only source of wage rigidity, but it is an important one - and the only one that can be remedied with the stroke of a pen.


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COMMENTS (7 to date)
Ronan L writes:

As a student of economics, and reading papers such as Blinder and Alvarez on US and EU price stickiness, I had always been under the impression that the principal reasons behind wage and price stickiness were, however awkward this might be for most economists, behaviourally motivated: trust and incentives, implicit contracts, that sort of thing, i.e. purely the relationship between firm and worker/customer.

I'd be curious to hear your thoughts on how this tallies with observations above and also on the interaction between quantity stickiness (cf. many of the points made on the link) and price stickiness (as per the points above).

R

Ted writes:

I think Tyler Cowen is confused anyway. When liberals talk about "wage stagnation." What they really mean is that there wages aren't growing as a sufficiently fast rate to meet whatever consumption needs they feel others are entitled too.

So, this has nothing to do with sticky wages or downward rigidity.

Many left-wing people feel that health care is a right. Well, there is no doubt the cost of health care and insurance are growing at a much faster rate than many wages.

Or, for example, many parents want to send their children to college, but their wages are not rising sufficiently to keep up with the rising cost of college.

When liberals talk about wage stagnation, they are talking about wages not rising fast enough relative to some desired consumption. Perhaps a more appropriate term would be affordability stagnation ...

By the way, wage flexibility at zero interest rates is probably a bad idea. Flexible wages put downward pressure on future prices. Expectations of lower prices (deflationary expectations), decrease output now through the standard means. Normally, the central bank can offset this by running an expansionary policy, but when our Federal Reserve refuses to do anything because the are governed by a silly "zero lower bound" mentality they cannot offset the deflationary pressure. Flexible wage in a deflationary scenario where the Fed is not going to offset it is a recipe for disaster. I wouldn't recommend we do anything to promote flexible wages right now, unless we get the Fed to do their job also.

eric writes:

Hey Bryan, I just got out of the Army and was going to work while I get my PhD in econ. You can reduce the actual unemployment numbers by one because I prefer to get free money for not working.

Ben writes:

Bryan, your labor market theory is based on PERFECT COMPETITION (with all it's rubbish assumptions). Once you consider that employees might have to search for jobs, we can understand how, due to job search costs, they might possess asymertical information about possible employers. Thus, employers have monopsony power as employees cannot find other employers easily, which could help explain why empirically we have several studies that find that the minimum wage has no disemployment effects.

Doc Merlin writes:

@Ben:
You must be a regular reader of one of the lefty econblogs, because that is something they say over and over again. Its true of some of the very basic theories, but Bryan's theories don't actually require perfect competition.

quadrupole writes:

@Ben:
Have you ever really seriously hired people? The asymmetry of information cuts both ways, and trust me it's incredibly expensive and difficult to replace employees (as hard or harder than getting another job in most markets). Even *now* I'm having huge trouble finding and hiring quality folks. You are only seeing one side of the friction... employers no more have monopsony power over employees than employees have over employers.

MMJ writes:

Basis NBER, the US went into recession in Dec07. Since then, the minimum wage is up 23.9%. Since the subprime crisis began in Feb07, the minimum wage is up 41%. I find it hard to believe that this has had no impact on employment.

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