My favorite job market paper so far this year

It is from MIT, by Jonathon Hazell and Bledi Taska of Burning Glass, here is the paper, here is Hazell’s home page, here is the abstract:

If wages are more rigid downward than upward, then unemployment is volatile during recessions. In benchmark models, the wage for new hires is particularly important for unemployment fluctuations, but there is limited evidence of downward rigidity on this margin. We introduce a dataset that tracks the wage for new hires at the job level—that is, across successive vacancies posted by the same job title and establishment. We show that the wage for new hires is more rigid downward than upward, in two steps. First, the nominal wage rarely changes at the job level. When wages do change, they fall infrequently, suggesting a constraint from beneath. Second, when unemployment rises, wages do not fall for new hires—though wages rise strongly as unemployment falls. We show that prior work, which studies the average wage for new hires, cannot detect downward rigidity due to changing job composition. Finally, we match a standard labor search model to our estimates, and uncover state dependent asymmetry in unemployment dynamics. After contractions, unemployment responds symmetrically to labor demand shocks; after persistent expansions, unemployment is as much as twice as sensitive to negative than positive shocks.

It is a true puzzle why the wage should be sticky for employment relations which do not yet exist!  (It is easier to see you might not cut wages for workers who had prior expectations and who will stick around and might wreck things due to being disgruntled.)

Do note this:

However the average wage for new hires, the object of previous studies, is not more rigid downward than upward—in contrast to our job- and establishment-level results on downward rigidity…

But note that in section 6.2 the paper shows that firms do not lower the average quality of job during a recession so as to lower the average wage offer — yet a further puzzle.  Section 6.3 considers whether quality of job reallocation across establishments might offset wage rigidity.

This paper raises many important questions, and it is the most significant progress on understanding wage rigidity I have seen since the questionnaire work of Alan Blinder and also Truman Bewley.

Recommended, both the paper and the job candidate!

Addendum: Note this earlier post of Alex’s, on workers moving to new jobs since the end of the recession.


Statistics lost its power:

" If you live in one of the towns in the Welsh valleys that was once dependent on steel manufacturing or mining for jobs, politicians talking of how “the economy” is “doing well” are likely to breed additional resentment. From that standpoint, the term “GDP” fails to capture anything meaningful or credible."

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This is not such a conundrum. Start with the fact that most employees are not interchangeable....they, mostly, have jobs that are different from other employees. Factory work might be an exception, but most workplaces have workers with different skillsets. This feeds into that condition that simply cutting wages by 10% doesn't offset a 10% reduction in business. The company might simply not need some worker's services at all. And if business conditions later require hiring, then the original wage is supported.

The argument that falling wages might accompany recessions assumes an undifferentiated population of workers. Then averages would matter...but actual work requrements is granular to the specific job. When I ran a business, there was very little occasion to simply cut wages and use X% more people. You either needed them or you no longer did. In the latter case adjusting wages was irrelevant.

"Factory work might be an exception, but most workplaces have workers with different skillsets. "

Even that's going away. In an automated facility all of the operators are skilled. Only a portion of their jobs are physical. And quite often the few positions that are mostly physical are Temps.

If it is an already existing job role, won’t the most desirable candidates already be employed and have experience in that role? How would you hope to attract someone who already has a job if you are going to offer them less money than they currently make?

If it is a role you need to fill during a downturn in business, presumably you also need that role filled when business turns around. So it might make sense to pay someone at a high enough wage so that they won’t be looking around as soon as the economy picks up, when it will be harder to find someone in what is presumably an essential role. Not exactly a stockpiling of labor, but akin to it in some ways. Also, you have to figure other employers are thinking similarly.

“It is a true puzzle why the wage should be sticky for employment relations which do not yet exist!”

Workers talk. If it is common knowledge that position X pays $15/hr locally, it might cause problems both within the firm and for the process of recruiting replacements if it leaks that it now offers $14/hr for new hires, even if that is justifiable based on a local increase in unemployment.

Wages are downward sticky for the firs 40 years, then upward sticky for the next 100 years if the Nixon Shock plays out like a standard impulse response. If we counted all the spectral moments then we have to include the soon to be extinct small states, then we can expect deflation for another thousand years.

We are simply waiting to do our 100 or 1000 years of deflation, but likely we do not have the patience. Hence we are due for another Nixon Shock.

Am I alone in noticing the fascination among economists in understanding how to cut wages rather than to increase them? I know, the explanation is that it's better to cut wages than to increase unemployment during a recession. During the Great Depression the Roosevelt administration discouraged wage cuts, believing that inadequate aggregate demand would be made worse if wages were cut. A cynic might ask what's the point of depression economics if wages can't be cut?

In defense of economists, they have simple a priori tools (like supply and demand curves) which are very good at explaining some things and not others. What happens to employment and wages during a recession is one of those things that isn’t explained well by those a priori tools (except for aggregate demand and aggregate supply, which seem to work pretty well).

Exactly. What I think is misleading here is this idea that hiring someone is just about wages. There's *a lot* of overhead associated with new employees (training, benefits, time from other employees to ramp up) that are not accounted. Also, during a recession there is a internal dynamic change where people start doing a bit more (everyone is afraid of being laid off) so the need for hiring is slightly smaller in that way too. I suspect wages are not the most decisive component in this puzzle, or at least not the deciding factor.

Does her paper tell her anything about her introductory wages during a recessions and how she should position he wage demands for her first job.

Don't we empirically know that when unemployment falls, existing workers simply take up more of the slack? When large scale layoffs occur, it makes sense that existing and new wages are sticky since they are now having to do the work of three people instead of one.

Maybe the stickiness of new hire wages is related to the people actually doing the hiring being concerned that their compensation might suffer if they lower the wages of new hires. In other words, it isn't the owners of the business that set wages, it is their agents.

I think the idea that wages are socially set is also valid. New hires fit into an existing structure and people have a strong view about where a particular job fits in that structure. A manager role has to be paid more for instance than a shop floor worker.

Chris A,

This looks like the most likely explanation of those made so far.

The remaining mystery is that there is a potentially similar sort of rigidity on the upside, which seems to be there less than the on the downside. Bewley and others showed worries about decreased morale of remaining workers is the key to downward nominal rigidity of wages for ongoing workers, but "wage compression" seems to also be a source of decreased morale, when new hires get paid more than existing workers with more seniority, possibly even doing more advanced work. This shows up in parts of academia a lot, especially in econ departments. I guess the need to attract scarce, sufficiently skilled workers simply overwhelms this possible impact on morale of current workers, but this is not all that obvious, so the reason for less upside rigidity is somewhat unclear.

It is a true puzzle why the wage should be sticky for employment relations which do not yet exist!

Is it really surprising, though? A new hire is someone whose bargaining power is at a maximum -- he can simply not take the job. His information is at a maximum -- he knows what similar positions are offering, and may be looking at multiple offers. He knows or can ask what other people at the same company have been paid when they were hired.

I know that when I was in the job market, an offer that was noticeably lower than the going rate was a big red flag. It's not like people are going to pay you more later on in return for being a good sport up front -- it's more like the opposite of that.

Bargain hunting with new hires seems like a very tricky thing to pull off. Wages are only part of the cost, and the risk of getting a substandard hire in return for your substandard offer seems very high. So unless the recession is so bad that people will jump at *any* offer, it seems like you're better off paying the going rate, or else spreading the work around your current employees.

"the paper shows that firms do not lower the average quality of job during a recession so as to lower the average wage offer — yet a further puzzle. "

Not really. You don't really have much leeway to "lower the quality of a job". If you are competing in a market place, especially in a recession, you don't dare hire less qualified or less capable people, just to get a lower wage. You end up with lots of problems. My experience was that customer service, employee morale and the functioning of a business really depends upon finding the best workers you can.

I think economists suffer from too much "aggregate quantity" thinking. For a business, the devil is in the details, and no one operates by trying to play with average wages vs average quality of work or worker. All of the arguments pertaining to this paper, and subject, seem to arise from assuming that employees are hired in aggregate bunches, that we can save money by cutting some wages and then retaining more people (can happen but rarely). As I mentioned above, people are hired for positions that have different functions. You either need them or you don't.

This also reminds me of the silliness in France about cutting the work week to 32 hours in an attempt to get more people hired...employment doesn't work that way.

My experience hiring for financial modeling skills is that I was constrained by my HR department’s salary grades and competition in hiring. At the macro level you can have rising unemployment but at the firm level you can be trying to hire a unique skill set that is in high demand. It shouldn’t be that surprising that in a recession the “losers” are concentrated in areas where skills are outmoded, while new hires are concentrated in new , growing areas where labor supply has not caught up. Just like in the housing markets, you can have over supply of the wrong kind of things and see prices rising for the subset of the market where supply is slow to catch up to demand.

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