Arnold Kling  

Two Ways to Look at Wage Behavior

What I'm Reading... Introduction to Microethics...

1. As Mark Thoma points out, for individual workers in given jobs, nominal wages are sticky downward.

2. As Pedro Silos and Lei Fang point out, workers who change jobs after being unemployed during a recession tend to take lower wages. Pointer from Mark Thoma.

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COMMENTS (3 to date)
Pedro writes:

2) But according to Alchian, they should take longer to find a job if 1) is correct, leading to higher measured unemployment.

joeftansey writes:

Given inflation, couldn't Thoma's chart indicate that leaving nominal wages constant is the cheapest way to cut wages? I.e. if you want to cut someone's wages between 2-3%, you can either do it explicitly now, or just leave their wages constant and wait it out.

This doesn't say anything about what we would see without inflation. I.e. if management didn't have the option to wait it out.

Has anyone investigated the extent to which nominal stickiness is an artifact of inflation?

Floccina writes:

Here is quote of Edmund Phelps on econ talk:

Differed from that--argued that companies have an incentive to set their wages above the market-clearing level--for their own self-interest. Didn't rationalize very well right away, but eventually saw what was going on. Equilibrium in the sense of no one being surprised by what others are doing is characterized by involuntary unemployment that comes from companies having a sense of self-interest in keeping their wages up and their quit-rates down. Wanted to give employees something to lose if company did badly. Hardly emphasized in succeeding literature.

So doesn't this imply that in a period of lower that expected inflation, working employees are more overpaid than normal and so their is not enough money circulating to reach full employment even though new hires are willing to work for less?

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