Are sticky nominal wages an overrated idea?

Via Adam Ozimek, here is one recent (still unfinished) paper, by Kurmann, McEntarfer, and Spletzer:

Using administrative worker‐firm linked data for the United States, we examine the extent and consequences of nominal wage and earnings rigidities for U.S. firms. We find less evidence of downward wage rigidity in the administrative data than has been documented in previous studies based on self‐reported earnings from surveys. In our data, only 13 percent of workers who remain with the same firm (job stayers) experience zero change in their nominal hourly wage within a year, and over 20 percent of job stayers experience a reduction in their nominal hourly wage. The lower incidence of downward wage rigidity in the administrative data is likely a function of our broader earnings concept, which includes all monetary compensation paid to the worker (e.g. overtime pay, bonuses), whereas the previous literature has almost exclusively focused on the base rate of pay. When we examine firm labor cost adjustments on both the hours and wage margins, we find that firms have substantially more flexibility in adjusting hours downward than wages. As a result, the distribution of changes in nominal earnings is less asymmetric than the wage change distribution, with only about 6 percent of job stayers experiencing no change in nominal annual earnings, and over 25 percent of workers experiencing a reduction in nominal annual earnings. During the recent Great Recession, this earnings change distribution became almost completely symmetric and the proportion of job stayers experiencing a decline in annual earnings rose markedly to about 40 percent. Finally, we exploit the worker‐firm link in our data to show that it is mostly smaller establishments that show evidence of asymmetry in their earnings change distribution. For these smaller establishments, we find that indicators of downward wage rigidity are systematically associated with higher job destruction rates.

Here is another recent paper, this one from the NBER.  It shows that real estate agents, who have flexible, commission-based wages, do have smaller employment fluctuations than sticky-wage construction workers.  But that difference is only by about 10 to 20 percent.

Here is my previous post on sticky wages: Basu and House show that real wages vary a great deal through changes in expected career paths.  Here is Alex’s 2014 post on half the men having new jobs since the recession.

Are your views on sticky nominal wages and the minimum wage consistent?

And how are nominal wages sticky for the unemployed?

Perhaps most significantly, high nominal demand economies such as Jamaica and Brazil (yes there are still a few left!) still appear capable of generating quite high rates of unemployment.

Comments

Scott Sumner, read this and weep! LOL. The two pillars of modern economics are sticky wages (or prices) and money illusion. A two-legged stool IMO that just lost a leg with this paper.

The papers seem to show that downward income rigidity correlates with job destruction, and that stable base wages flow through reduced hours and benefits. Nothing in the reported results validates your claim.

["stable base wages flow through reduced hours and benefits"]

This is a way for total nominal employee costs to adjust without wage rates adjusting, which certainly questions the validity of including wage rigidities in models. I wonder what the definition of "smaller establishments" is.

Nominal wage stickiness influences hours worked. They aren't competing predictions. For example, literature on German wage stickiness emphasize the hours worked per employee channel. Models that include stickiness usually allow for flexible hours due to changes in net productivity, and the gap between labor productivity and substitution of consumption and labor hours. It doesn't predict sticky total wage claims.

"When we examine firm labor cost adjustments on both the hours and wage margins, we find that firms have substantially more flexibility in adjusting hours downward than wages. As a result, the distribution of changes in nominal earnings is less asymmetric than the wage change distribution"

Isn't that the sticky wage phenomenon --- instead of nominal wages falling, hours worked falls?

"Are your views on sticky nominal wages and the minimum wage consistent?"

Yes, both have negative employment effects. Only some people have difficulty answering this question.

If 10 workers produce 100 widgets and demand falls to 90 widgets why would it not make sense to sack 1 worker? This is completely different from the sticky wage argument which is that employment falls because wages do not fall. The study shows that despite nominal wages falling employment does not stay constant.

But nominal wages haven't fallen, hours worked have( in the case of overtime).

All this says is that if hours are flexible, firms that pay overtime will cut hours per worker rather than workers. Most models only measure unemployment as aggregate hours worked, however; the distribution of those hours is unspecified. So usually such cuts would be considered employment cuts, not wage cuts.

There's no such thing as "demand falls to 90 widgets". There's demand, which is a curve, and quantity demanded, which is a function of price.

If demand falls such that 90 widgets are demanded at the current price, it makes just as much sense to cut prices to restore quantity demanded and cut wages to restore profit margins.

Like in any market there are substitutes. Cutting wages, firing people, reducing hours. Substitues for the employers looking to cut labor costs.

Yes. Hours worked changed. Now if I am fired, I am hired somewhere else, still restricted on hours because if I had more hours I would piss off the incumbent workers, except that I am making less money. When the economic recovery eventually comes, I am still making less at an hourly rate, but my co-workers not laid off in the recession are making the same pre-recession wage.
So the recession has a huge, permanent relative wage loss.
Which means I have a strong incentive not to lower my reservation wage during a recession unless I am well and truly desperate.
Sounds pretty much in line with what we would expect assuming wage rigidity.

BC is right. I am not BC.

For the definitive proof that Keynes was right that flexible wages would not reduce unemployment during a recession see http://www.philipji.com/involuntary-unemployment

Even if Keynes was wrong about most other things he was right on this central point.

I don't think Philip George takes himself seriously enough.

Tyler Cowen wrote: "Perhaps most significantly, high nominal demand economies such as Jamaica and Brazil (yes there are still a few left!) still appear capable of generating quite high rates of unemployment."

Perhaps those high rates of unemployment reflect high *structural* unemployment, which seems to me is a relatively minor facet of the discussion about sticky wages and unemployment.

Structural unemployment in Jamaica? So you are saying the economy of Jamaica suddenly shifted from it's usual output (agriculture, some raw materials, tourism) to something entirely different that requires a skill set very difficult to find in the Jamaican labor force? What would that shift consist of? Bobsled instructors?

No, I'm not saying "the economy of Jamaica suddenly shifted from it’s usual output".

I note that since 1992 the average unemployment rate in Jamaica has been about what it is today, so the notion of persistent high structural unemployment strikes me as worth considering (c.f. http://www.tradingeconomics.com/jamaica/unemployment-rate ).

Further, measures of productivity (labour and TFP) show persistent decline (e.g. "Results from research conducted by the Jamaica Productivity Centre, using data from 1972 to 2007 indicate that labour productivity in the country fell at an average rate of 1.5 per cent per annum. Also, productivity including labour, capital energy and other inputs fell at an average rate of 1.74 per cent per annum during the same period." from http://jamaica-gleaner.com/gleaner/20130814/news/news1.html )

I find it a little hard to believe that labor productivity feel by 40% over that period; something must be going terribly wrong. Is there enough emigration of the most skilled to drive that large a drop?

"Perhaps most significantly, high nominal demand economies such as Jamaica and Brazil (yes there are still a few left!) still appear capable of generating quite high rates of unemployment."

The proper way to state this is that "there are high nominal demand economies which are consistently incapable of generating full employment". But if labor productivity is falling, it may be that too many job seekers are Zero Marginal Product workers.

Anthony asked: "Is there enough emigration of the most skilled to drive that large a drop?"

I expect that you can satisfy your own curiosity via google better than I can, but the search term
jamaica labour productivity
pulled up a whole bunch of factors other than emigration (e.g. page 11, written twenty years ago, here:
http://web.stanford.edu/~dharris/papers/Approaches%20to%20the%20Problem%20of%20Productivity%20in%20the%20JA%20Economy%20(1).pdf )

Am I correct to assume that Cowen is pleased with the results of this study. Of course, in a 1099, Uber economy, one would expect compensation to fluctuate with the economy. This also means there is one less "stabalizer", which I assume also pleases Cowen; "stabalizers" only appeal to those who don't understand economics. Now, if we could just get people to understand there is no such thing as AD the mission will be complete.

"But that difference is only by about 10 to 20 percent": 20% is evidently a mere bagatelle.

Agreed.

Nominal Wages are sticky because of this:
A polarization of people are like this (link) and those who are adamantly opposed to people like this (in comic form)"

http://www.smbc-comics.com/comic/your-greatest-weakness

Levity - but not really. JB

Read through this and the links and first thought was "What would Arnold Kling say?" and he has commented but I fear far too modestly . Looking at how sticky wages are under different compensation schemes, rather than in the aggregate, would seem to be the thing to do from the PSST perspective. To avert the disastrous consequences of sticky wages, approaches should be tailored to the realities of the wide variety of compensation schemes. Since employer provided benefits add to stickiness they should not be sheltered from taxation. Similarly the compensation implicit in tenure arrangements contribute greatly to wage stickiness and taxation should be adjusted accordingly, particularly in the education and governance industries. Total compensation to tenured bureaucrats and educators should be taxed at special higher rates to save the economy and for the welfare of children.

My first thought was, who gives a shit what you think?

Haha. What witty repartee. You must be a professor at Podunk U

No, but I do fuck your old lady in the ass, she loves it!

Yes, Max U would calculate and compare the monetary value of lost hours, smaller bonuses, etc. But many (most) normal folks probably focus on base wages...cut those and endowment-effects and pride will often transform transient feelings of sadness, or simple unawareness, into anger and resentment. So, yes, wages are still sticky. Wages do not = compensation, i.e., it's not a "Sticky Overall Compensation" theory.

I live and work in the non-union private sector. Nominal hourly wages are not perfectly flexible but they can certainly adjust downwards by amounts on the order of five per cent per year under market pressures. Some of that involves employers who overpay going broke and being replaced by competitors with cheaper work forces. My own income easily goes up or down by thirty percent from year to year based on the market.

The argument that wages are downward sticky seems to be at the core of the arguments of De Long and Krugman that higher inflation would help the economy but:
1) higher inflation would only help if there were some group of people whose real wages need to fall
2) that group has to be large enough and over paid by enough to have macro consequences on employment and output
3) that group has to be powerless to prevent the erosion of their real incomes through inflation.

So for the inflationistas my question is: Who are these people whose real wages are too high but who have no bargaining power?

Rural, white factory workers. As a side benefit this can also be reparations.

Basu and House show that real wages vary a great deal through changes in expected career paths.

Some career paths start in sales/marketing. Other career paths (law, engineering, science) begin with real work, and then progress to sales/marketing.

Someone who tries to continue doing real work past his/her sell-by date is going to face unemployment and/or shrinking wages.

Sticky nominal wages are probably the only interesting and useful idea to come out of macroeconomics in the past century.

We are talking about one idea here. I think it should be: Is sticky nominal wages an overrated idea?

I think sticky wages still exist in some industies. Saying that wages change doesn't mean they're not sticky. An example, I'm a software engineer and it's expected that in the beginning of your career, you switch often. The reason is that your employers compensation does not increase at the rate that the market values your labor. The normal corporate wage structure isnt setup to handle this type of growth. My last job switch added 30k to my compensation package.

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