How sticky are wages anyway?

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.


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