We all know there is nominal wage stickiness, but there is some real wage stickiness as well. Employers are reluctant to cut real wages for fear of damaging worker morale. Bryan Caplan also has written about “firing aversion,” which you can think of as an extreme case of real wage stickiness.
In many cases employers might prefer some entirely different way of organizing production and staffing their organizations. Yet they cannot get from here to there, in part because of real wage stickiness. Workers do not take kindly to the dissembly and reassembly of a firm and indeed of a big part of their lives. And so employers remain stuck. They’re still making profits, however, but the profit maximization is local rather than global.
My question is this: imagine an (admittedly impossible) thought experiment where all of the capital and labor resources are temporarily released and employers can rebuild their firms from scratch, recontracting for new wages, new personnel pools, new implicit promises to workers, new capital investments, new market positionings, and so on.
After this reshuffle, how much will income inequality have gone up? (Is there any case it might go down? I don’t see that, but feel free to make that argument in the comments.)
Given your answer, how much will income inequality go up, not because of any new cause, but simply because any economy slowly, over time, rebuilds its contractual relationships?
And what does that say about the effects of policies designed to stem growing inequality?