Tyler on Wage Stickiness: A Quick Note

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

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.

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.

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.

@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.

@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.

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.