How sticky are wages anyway?

by on June 13, 2013 at 6:59 am in Data Source, Economics | Permalink

On the front of this new Elsby, Shin, and Solon paper (pdf) it reads “Preliminary and incomplete,” but if anything that is a better description of the pieces which have come before theirs.  They have what I consider to be the holy grail of macroeconomics, namely a worker-by-worker micro database of nominal wage stickiness under adverse economic conditions, including the great recession and with over 40,000 workers, drawn from the Current Population Survey.

Here are a few results:

1. When looking at the distribution of nominal wage changes, there is always a spike at zero.

2. That said, the spike, ranging from six to twenty percent, isn’t as big as one might expect.

3. The fraction of hourly workers reporting a nominal wage reduction always exceeds ten percent, and the fraction of non-hourly workers reporting a nominal wage reduction always exceeds twenty percent.

3b. In 2007-2008, 37.1% of U.S. workers in the non-hourly sample experienced negative nominal wage changes.  That’s a lot.  In the following years that figure was  over thirty percent.  See Table 6 on p.24.

4. These figures are for workers who stay with the same employer for a year or more, and thus they are from sectors where nominal stickiness is especially likely.  Overall nominal stickiness is probably considerably smaller than those figures indicate, as the broader pool of workers includes temps, those on commissions, those with short-term jobs, and so on.

5. If you compare the great recession to earlier downturns, “…initial evidence appears to be weak for a simple story in which the combination of downward stickiness in nominal wages and low inflation has generated high unemployment through excessive rates of job loss.”  If it were primarily a story of sticky nominal wages, we should have expected layoff rates to be even higher than they were.

6. Overall wages are less sticky in the UK than in the U.S.; for instance “the proportion [of measured UK workers] experiencing nominal wage cuts regularly has run in the neighborhood of 20 percent.”  (And here are some recent related results.)

7. Other studies with true microdata also find strongly procyclical real wages, often mediated through changes in nominal wages, including nominal wage declines.

8. The slowdown in real wage growth for U.S. women, during the great recession, follows puzzling patterns.

9. None of these figures include wage changes which take the form of changes in the quality of working conditions, chances of promotion, fringe benefits, and so on.

NB: This paper does not show nominal wages to be fully flexible, nor does it show that observed nominal wage changes were “enough” to re-equilibrate labor markets.  Still, this paper should serve as a useful corrective to excess reliance on the sticky nominal wage hypothesis.  Nominal wage stickiness is a matter of degree and perhaps we need to turn the dial back a bit on this one.

Note also that this paper need not discriminate against neo-Keynesian and monetarist theories, though it will point our attention toward “zero marginal revenue product” versions of the argument, in which case the flexibility of nominal wages simply doesn’t help much.  Note also that such versions of the argument may have somewhat different analytic and policy conclusions than what we are used to expecting.

Addendum: Also from Solon, this time with Martins and Thomas, is this paper about Portugal (pdf), showing considerable nominal flexibility for entry wages in labor markets.

1 dlr June 13, 2013 at 8:58 am

3b. In 2007-2008, 37.1% of U.S. workers in the sample experienced negative nominal wage changes. That’s a lot. In the following years that figure was over thirty percent. See Table 6 on p.24

That is not what the table says. It says that 37.1% of US non-hourly workers experienced negative nominal wage changes in 2007-08. Only 18.7% of its hourly workers saw nominal wages decline in 07-08, roughly unchanged from the previous two periods.

2 Tyler Cowen June 13, 2013 at 8:59 am

Thanks, I will fix.

3 Chris June 13, 2013 at 9:44 am

human capital accumulation, by itself, would explain why wages tend to rise more than fall. it’s a bad test of sticky wage theory.

4 Jacob A. Geller June 13, 2013 at 7:43 pm

That wouldn’t explain the spike in proportion of workers experiencing 0% change… (Relative to +X%)

5 Phill June 13, 2013 at 10:05 am

>showing considerable nominal flexibility for entry wages in labor markets.

When we’re talking about wage stickiness, aren’t we also talking about expenditure inflexibility? i.e. if I consume a fixed X/year (mortgage, car payments, y number of kids to feed), and have a expectation that my wage today anchors my future wages, I’m going to be real resistant to taking a lower wage in the short to medium term.

However, a young person doesn’t encounter these constraints. They have little to no fixed consumption on account of having had no real income to date and reduced expectations on the account of the economy having tanked; a young person in Portugal is glad she has a job to begin with and is likelier to take whatever she can get.

6 Bill June 13, 2013 at 10:50 am

You can also find an index of wage stickiness by googling for the list of faculty salaries for faculty in Virginia public colleges. Unadjusted for productivity.

7 prior_approval June 13, 2013 at 11:36 am

Hey, don’t be a tease – here is the link for GMU professors

And since it is not personally referenced, and since the link has been allowed to stay before, it is reasonable to assume it won’t be scrubbed.

8 JWatts June 13, 2013 at 11:40 am

The two of you ought to get a better shtick. This repetitive trolling routine is getting boring. Maybe start it out with a joke or tap dance or something?

9 Andrew' June 13, 2013 at 12:31 pm

What is brown and sticky?

10 Bill June 13, 2013 at 2:38 pm

JWatts, You can always be counted upon to make an insightful personal comment about anyone who comments on this blog.

11 Bill June 13, 2013 at 2:59 pm

Also, JW, I will continue to make these types of comments when economists refer to minimum wages, a generous safety net, or sticky wages that do not decline during one of the worst recessions we have ever had.

The comment about faculty and tenure generally is from a faculty member who served on the Council of Economic Advisors and who commented to me once that he would be interested in seeing how economists would respond to some of the surveys on economic literacy passed around at AEA conferences if they had a question about tenure on it.

Frankly, anyone who thinks the poor have it easy–or who should adjust their wages more– should get on a bus at 6am in the morning to meet their fellow citizens who trudge off to work at low pay jobs.

12 The Anti-Gnostic June 13, 2013 at 6:18 pm

Supply and demand works just fine to establish the market clearing price, except when billionaires start complaining that labor is too expensive. Then the free-market economists have all sorts of policy prescriptions.

13 DesolationJones June 13, 2013 at 5:33 pm

What percentage of workers are non-hourly?

14 zbicyclist June 13, 2013 at 5:36 pm

Story in the Trib today about NLU, which has fired a large number of tenured faculty. Sure, they’re being censured by the AAUP, but that seems to be a paper tiger. “According to the AAUP’s guidelines, a university can dismiss tenured professors when confronting a financial exigency — a claim she didn’t make.
“The AAUP’s censure is less damaging than proclaiming a financial exigency,” Megahed explained. “That could cause lenders to call in our loans.””,0,6155849.story

“The professors were among 63 full-time faculty dismissed in 2012 by National Louis, long known as a teachers college although it started as a business college in 1989. Over a two-year period, the university cut its full-time faculty in half.” One formerly tenured professor was hired as an adjunct at $1440 a course.

(Now, just to be clear here, I’ve personally never held anything but “at will” positions, and find the concept of tenure a bit quaint. I’m just posting this to show that stickiness can eventually come unstuck)

15 Andrew' June 14, 2013 at 7:00 am

Tenure exists because of the unique factors of academia and lo-and-behold exists mainly in academia and the judiciary, probably for similar reasons (…Bill…I’m lookin’ at you).

As a blanket policy at best it hits the median right, but it exists for a reason and is not as powerful as the people who believe the dangle believe.

16 Andrew' June 14, 2013 at 7:02 am

Bill, I’ll make you a deal. You write a positive economics book on tenure and I’ll buy it.

17 JVM June 13, 2013 at 9:41 pm

“If it were primarily a story of sticky nominal wages, we should have expected layoff rates to be even higher than they were.”

Wouldn’t we expect job stickiness as well as wage stickiness? It seems to me that most employers find it highly unpleasant to fire workers and sometimes protect workers for personal reasons.

18 David June 14, 2013 at 12:06 am

There is an stream of research published mostly in the accounting journals on so-called sticky cost. Various attempts have been made to disentangle truly sticky costs from the quasi-stickiness induced by management expectations of future hiring and training costs and/or agency costs arising from managerial disutility to cost reduction.

See for example:

19 David June 14, 2013 at 12:08 am

Not sure why the three links that I posted above appear as one line, but they are three distinct URLs.

20 Jacob A. Geller June 14, 2013 at 4:20 am

“3b. In 2007-2008, 37.1% of U.S. workers in the non-hourly sample experienced negative nominal wage changes. That’s a lot.”

Is it really? I don’t know what to make of that number except as it relates to the decline in NGDP. I the fall in NGDP was very large then 37% of non-hourly workers seeing wage cuts might be very small… Where is Sumner when you need him?

21 Tom Hynes June 14, 2013 at 11:38 am

Firms could have sticky wages yet employees show variations. If a firm had a sticky $15 wage, it lays off people, they go to work for $8 an hour. In fact, all firms could be absolutely fixed, but employee salaries jump all over the map.

22 Floccina June 14, 2013 at 4:42 pm

I bet Government wages are sticker that other wages.

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