How sticky are wages today anyway?

by on June 24, 2010 at 10:26 am in Economics | Permalink

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?

Or take illegal immigrant Mexican construction workers, a group which lost jobs in large numbers following the crash.  Are they — who often came from $1 a day environments – also supposed to have sticky wages?  They are out of work in massive numbers.  A lot of them went back home, which is a sign they are willing to make major adjustments.  It simply may be they were no longer employable in the United States at any plausible wage.

The alternative model is that many low-education workers are not employable through marginal changes in current conditions.  It may require a big upward Schwung for the entire chain of labor, so that desperate employers at the bottom of the ladder, unable to find anyone else, grudgingly hire these not-so-productive individuals because there is no other way of expanding.  In other words, it requires conditions which raise the marginal value product of these workers to the private sector, keeping in mind that the fixed costs of hiring a worker mostly have been going up due to the greater bureaucratization of society.

Under this hypothesis, the stimulus that works in the short-run is direct government employment of low-skilled labor, not funneling money through private contracting, and hoping the unemployed get picked up.

What should the government do with these workers?  Does their direct employment conflict with the Davis-Bacon Act or other regulations?  What wage should we pay to make sure we don't drain off workers from private sector jobs?  How much longer does it take such forms of stimulus to result in sustainable, private sector jobs?

As you'll see in my Principles text with Alex, we both believe that wage stickiness (both nominal and real) is a genuine issue in market settings, even in the absence of government intervention.  Still, I'm not convinced stickiness is the major problem today, at least not in a simple, direct manner.

If there is going to be more U.S. stimulus, it's exact nature should be thought through very carefully.  It's an additional question whether our politics is up to that.

1 bjk June 24, 2010 at 11:08 am

“It simply may be they were no longer employable in the United States at any plausible wage. The alternative model is that many low-education workers are not employable through marginal changes in current conditions.”

Wait, so immigration does have something to do with unemployment? There is no such thing as cheap labor?

2 azmyth June 24, 2010 at 11:17 am

Minimum wage deserves at least a mention. The opportunity cost of not hiring a high skilled worker is far higher than not hiring a low skilled worker. High skilled workers also have a lot more benefits and other flexible wage substitutes. Workers can be asked to work unpaid overtime, or get a smaller bonus, for example. Workers at the minimum wage aren’t legally allowed to do those things.

3 Lou June 24, 2010 at 11:57 am

Wouldn’t an obvious way to increase these workers’ value to potential employers be to lower taxes on those employers?

Azmyth seems to be on target re: minimum wage. Government putting important resources to work at relatively unproductive tasks doesn’t strike me as a good idea, especially considering how American taxpayers are beginning to act like Ricardians.

4 Ano June 24, 2010 at 12:05 pm

Stagnating/falling wages and unemployment CAN coexist in a Keynesian world if wages aren’t falling fast enough to keep the market in equilibrium. If the reason they aren’t falling fast enough is nominal rigidities, that is a pro-Keynes story, right?

5 roversaurus June 24, 2010 at 1:26 pm

You start your post with EVIDENCE that wages are not sticky. Then you end your post by saying that you BELIEVE wages are sticky.

6 Anthony June 24, 2010 at 1:55 pm

Spencer – over 90% of employed teenagers were paid more than the minimum wage.

Most teenagers don’t *need* to work, and so the value of their leisure time is rather high relative to their productive capabilities.

7 Cliff June 24, 2010 at 3:26 pm

spencer, obviously the solution is to increase the minimum wage to $100/hr, surely then we would see full employment? After all, your correlation=causation theory without supporting data is very compelling.

8 spencer June 24, 2010 at 4:05 pm

No Cliff,

I am not saying anything about theory.

I am just saying what the data says.

My statement is 100% data and zero theory.

Over the past 30 years the only time minimum wage employment increased was when the minimum wage was raised. Every other year minimum wage employment fell in absolutes terms.

9 Lou June 24, 2010 at 4:38 pm

Spencer, I suggest you buy a book called “econometrics” and read it. Your logic is no substitute for it.

10 DanC June 24, 2010 at 5:08 pm

To Tyler

Perhaps higher taxes and increased regulations have increased to the point that low wages cannot overcome the government burden.

Plus the world is full of unskilled labor, often in countries that encourage growth. Those jobs, in manufacturing, are easily shifted.

Plus many employers may feel that it is easy to quickly higher unskilled labor if the economy starts to grow, especially restaurants, tourism, customer service.

Plus many construction and other stimulus jobs are rewards to the politically connected i.e. a very round about way to supply political operatives and money to political campaigns.

The auto industry and housing construction have blown a big hole in the job market. Middle class jobs that are gone.

11 Josh June 24, 2010 at 10:01 pm

“Doesn’t that mean…um…their wages aren’t so sticky downwards? And thus Keynesian economics is not the final story?”

Keynes on sticky wages:

“In this summary, we shall assume that the money-wage and other factor costs are constant per unit of labour employed. But this simplification, which we shall dispense later, is introduced solely to facilitate the exposition. The essential character of the argument is precisely the same whether or not money wages are liable to change.” (Chapter 3, Part II)

According to David Andolfatto, Keynes went on to argue that sticky wages would actually help an economy.

http://andolfatto.blogspot.com/2009/02/on-krugman-barro-boneheads-and-keynes.html

I’d love to see you guys duke it out over this one. Here’s some more:

http://economistsview.typepad.com/economistsview/2009/12/on-the-consequences-of-nominal-wage-flexibility.html

http://krugman.blogs.nytimes.com/2009/12/09/wages-and-recovery/

http://krugman.blogs.nytimes.com/2008/11/29/changes-in-money-wages-and-amity-shlaes/

12 Doc Merlin June 25, 2010 at 12:50 am

@Tyler
Enforcement of immigration laws on employers may have a large part to do with illegals being out of work.
The rise in minimum wage with the low end legals being out of work.
Expectations of increasing costs due to health insurance reform, are why the higher end workers are out of work.

All this is supply side, and microeconomic, not demand side and not macroeconomic, but they have huge macroeconomic implications.

@Spencer
“If standard theory was right that the minimum wage prevented low skill workers from being employed as the real minimum wage fell minimum wage employment should have risen. But just the opposite happened.”

You are ignoring the macroeconomic effects of having people being negatively productive. If someone is on unemployment instead of being employed at minimum wage then they are having a negative effect on the economy instead of a positive one. So, in the macro, tiny changes in minimum wage should have a very large effect on the economy, disproportionate to their micro effects, totally separate from changes in the number of people employed at minimum wages.

13 azmyth June 25, 2010 at 11:14 am

http://www.nytimes.com/interactive/2009/11/06/business/economy/unemployment-lines.html
There’s some data for ya. Unemployment rate is far higher among groups affected by minimum wage than it is among groups whose productivity is higher than minimum wage.

My point wasn’t that minimum wage is bad (although it is) nor that it has risen (it’s been up and down historically). It was that higher wage workers have more flexible wages than low skilled workers. Low skilled workers don’t have benefits to cut, nor do they get large year end bonuses or stock options. Thus, when their productivity takes a dive, they suffer more unemployment and less wage loss than higher skilled workers. Low skill unemployment is way more procyclical than high skill unemployment.

14 Pete June 25, 2010 at 11:30 am

In my experience (higher wage employees) wages are sticky because of morale issues. Example: An employer has 10 people all making the same wage and needs to cut payroll by 10%.
Option 1: Cut everyones pay by 10%. Result: 10 disgruntled workers with falling productivity across the board. Risk that the best employee(s) leave for better wages.
Option 2: Lay off the least productive worker (who may only be accounting for 6 or 7 % of productivity anyway). Result: Small cut in productivity. Little risk of losing best workers.
Beyond the math, the practical reality is that it’s easier to manage 9 people who are happy than to manage 10 who are not.

15 chris June 25, 2010 at 11:51 am

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?

You’re not seriously comparing erosion of the purchasing power of nominally stationary wages over *decades* (including numerous years of positive inflation) with ability to *rapidly* adjust wages during a recession with little or no inflation?

16 JeffreyY June 27, 2010 at 2:09 am

I’m amused that Tyler presents data that doesn’t support the conclusion he says it supports; pivots off that to make the point he wanted to make in the first place; and then contradicts the conclusion he claimed to draw from the data.

That is, real wages falling gradually over decades says nothing about whether nominal wages are sticky in the short term, and Tyler knows it.

17 JonF June 28, 2010 at 10:11 am

Pete, While I agree with you that layoffs are less damaging to morale than wage cuts, they aren’t cost-ree either. Generally companies do not tell workers “Your job is safe”, so when layoffs happen everyone becomes anxious about his job. Plus, the remaining workesr end up doing more work for the same wage, which may not be a wage cut but is still annoying. And if the layoffs are deep and repeated then even the best workers start fearing they will be next and they will start to look to jump ship.

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