Real wages are flexible now

The restaurant used to pay you $13 an hour, now they pay you “$13 an hour plus p = ?? of Covid-19.”  That new wage is a lower real wage.

Of course some workers are quitting, others are trying to shift back to disability, and so on.  Those are movements along labor supply curves, not proof of sticky wages.

Plus other employers are taking unprecedented latitude in shifting around work hours, demanding new levels of commitment, asking workers to scrub down surfaces more and wear masks, and above all offering weaker promotion ladders, etc. — all cuts in the real wage.

I expect unemployment levels to rise to new and scary heights, and yes I do think the government should do something about that.  But if you are analyzing the status quo with “a sticky wage model,” that assumption is probably wrong.  Even though it is usually correct.

Of course at some point in the future I expect wages to become sticky again.  Perhaps that is how we will know things have stabilized.

“Flexible wages on the downside, sticky wages on the upside” is perhaps the best assumption at the moment.

A further lesson is that sticky wages are not the only driver of unemployment, and the “fixed cost of working” models of Richard Rogerson and others have been underrated for a long time (to oversimplify a bit, given fixed costs it is not worth everyone coming in to work at some levels of demand/productivity).


for the millions of people with NO job concepts like "sticky wages" are meaningless

people with no jobs pay no taxes which translates into no government revenue

the best thing you can give anyone is a them handouts and no surety of when they will work again is bassackwards thinking

in the fullness of time it will be clearly seen that the cure was worse than the disease...the financial, social, economic and psychological damage will dwarf physical damage

we are a herding species right now the herd is being stampeded into an economic abyss by fear and paranoia narratives

It will be hard to find anyone in Italy, Spain, or France to agree that what is happening to them is merely a matter of fear and paranoia narratives.

people with no jobs pay no taxes which translates into no government revenue

The government doesn't need revenue. Spending has no relationship to tax revenue. If the government needs to buy something, often votes, it simply enpixelates the funds, just as it's doing now. Taxes are a method of social manipulation, not a meaningful revenue source.

If we stop the quarantine tomorrow, then more Boomers will die but the economy roars back into life. What exactly is the downside here?


Bonus trivia: as TC posted a link the other day, patients value a doctor who has good bedside manners (they can measure this) rather than one that's objectively competent (which they can't). So gallows humor has no place at the patient level. What's worse of course is a physician with gallows humor with patients who's also incompetent. Kind of like my critics who think Herd Immunity is a good thing but won't voluntarily contract Covid-19 as a public service...why is that? They want herd immunity but want to be in the 40% or less of the population that won't be infected (N.B.- herd immunity requires 60% or more of the population to get infected).

There might be no hypocrisy in advocating herd immunity without volunteering to be infected.

The infection itself is costly for the volunteer, obviously, even if the cost is merely inconvenience for the individuals that turn out to be completely asymptomatic. So the cost is private. The benefit is external or public. People don't want to volunteer to be infected because herd immunity is for each individual an externality that is benefit for the herd. It's a benefit for the herd because the volunteer's later immunity means that person can now serve the public, say, as restaurant worker.

Real wage dropping bores me to tears. Check out this clash on the bridge between Hubei and Jiangxi citizens as workers from Hubei try to get to their jobs in Jiangxi. Jiangxi police and Jiangxi people say no way, not in my province. Take your COVID elsewhere. This is what happens when national government lifts quarantine too early. Nobody trusts the official numbers or the judgement of officials.

Conversely, there's been a serious erosion in perceived property rights. Calls for expropriation are common depending on where you look on the internet, and at a much higher rate than normal. With Trump's new invocation of the DPA against GM, there needs to be a credible commitment to not expropriate.

@AW - good observation, wartime does that (WWII Ford forced to produce tanks rather than cars under wartime powers act), and inequality decreases during wartime conditions, as Piketty observed. So finally you 99%-ers will have your revenge against me, the 1%. But beware if you're next, as a revolution always devours its own young.

There's no revolution here, Ray. Just mother nature doing the devouring. GenX, Millennials, and Gen Z are the most docile generations in a long while. They never put up a fight against society like the Boomers did. Those generations medicated on mochaccinos at the local Starbucks and glued their eyeballs to their screens. They went along with all the wars and bailouts without much complaint, at most a few mean Tweets.

The U.S. has just added 25% more coronavirus cases in 24 hours, and the issue is wage flexibility?

Yes, wage flexibility is a very appropriate issue for MR. There are other posts and sites where you can wax hysterical.

You take issue with economics on an economics blog? Really?

I thought this was a pandemics blog.

The first sentence of this post reads: "The restaurant used to pay you $13 an hour, now they pay you '$13 an hour plus p = ?? of Covid-19.'"

I think of wage as a price paid for labor services, and price is the money-payment part of the deal; it is the money transferred from payer to payee.

We need a word to signify the money-payment part of a deal, and if one uses "wage" or "price" in some other way (throwing in, for example, the hazard of catching Covid-19) we no longer have a word for that.

Why only that hazard thrown in? There are innumerable non-wage job attributes one could throw in. Which ones are being thrown in?

Tyler writes:

"Plus other employers are taking unprecedented latitude in shifting around work hours, demanding new levels of commitment, asking workers to scrub down surfaces more and wear masks, and above all offering weaker promotion ladders, etc. — all cuts in the real wage."

Isn't talk of real wages, in contrast to nominal wages, about what the (nominal) wages can get you, after you've punched out from work? Do we want to make "real wages" about non-wage job attributes?

I similarly dislike when economists speak of a cost as "price" when the cost involves more than the money paid to the seller.

Tyler suggests a supply & demand diagram in which "real wage" is on the vertical axis, and suggests that the now-not-going-work phenomenon is a movement along the labor supply curve. I am more inclined to keep plain old wage on the vertical axis and think of it a shift back in the labor supply curve. Hell no, I'm no longer showing up for $13/hour! My willingness-to-be-paid to labor in your workplace has shifted!

I understand that Covid-19 hazards make downward stickiness in wages less of a problem in a lot of lines of employment, a result like that of reduced downward stickiness.

Yes, as Adam Smith said. He argued at length that the total (utility( value of compensation had to equalize by arbitrage across occupations.

"Why only that hazard thrown in?"

I assume that the CCP-Coronavirus is the distinctively new compensating wage differential that he's trying to factor in.

Indeed, as TC points out, the fact that workers have not gotten hazard pay is one of the biggest surprises to me with Covid-19. Here in Greece one guy that rents a grocery store from me cannot get workers to man the cashier, even though the stores are very profitable now. In fact he had to close one grocery store for lack of employees. They are too afraid to come to work. Ditto some workers I have doing some real estate renovations in Athens. I'm not afraid of Covid-19, but I happen to be safely in a remote village, self-sufficient except for electricity.

Bonus trivia: exponential growth now in the USA with Covid-19 means it's game over. The difference between being prepared and being swamped is, when you have exponential growth in new cases, about two weeks at best. It's game over and the "herd immunity" crowd won; older Americans will start dying in hospital hallways soon.
I hope you're proud of yourselves, Zoomers. When it comes time for you to take a bullet for the economy I hope you don't complain. (And I hope, as a 1%-er, not to contract Covid-19 due to my wealthy, sheltered, lifestyle; fingers crossed).

Zoomers are lining up at the unemployment line and expected to pay for this $2T bailout that they will mostly not benefit directly from since they don't have much in the way of stocks, bonds, or small business. Some will hang on to their jobs thanks to the bailouts but as Tyler politely suggests, the employer is in a position to low ball them on wages (with good economic reason I might add but it still sucks for workers). Will be interesting to see how they handle this curve ball thrown to them by incompetent gerontocrat leaders.

As to "hazard pay," my employer has increased base pay by 20% until at least mid-April for those employees who have to come to the office. Ours is a large corporation with some business lines defined as essential.

Even doctors asking for protective gear to do their job are getting fired. Everybody is flexible now in a pandemic. Flexible? Expendable. That doctor also worked the ER on 9/11. That man has America coursing in his veins but he is treated like garbage because he is a worker.

Should employers cut wages or hours? Which is more palatable to employees? I ask these questions because many clients have consulted with me about maintaining a business/practice with collapsing revenues. Now with April rent soon coming due, clients with commercial properties have already been alerted by tenants that they can't pay April rent (or all of it anyway). Indeed, one creative tenant asserted a legal excuse for not paying April rent: Force Majeure. I've suggested the same legal excuse for employers being excused from performance under employment contracts. While financial and other economic crises are foreseeable, pandemics on this scale are not (that's the distinction one would make). Anyway, I expect such legal arguments to get lots of attention as businesses fail to pay wages, rent, and other costs, and to look for legal excuses. How would such an argument apply to debt? After all, loan commitments have force majeure clauses, excusing the lender from funding the loan in case of unforeseeable events. If the lender has a legal excuse, why not the borrower? Crises make for interesting times.

Does this not apply all the time? Money plus costs/benefits to health and well being...

'The restaurant used to pay you $13 an hour, now they pay you “$13 an hour plus p = ?? of Covid-19.” "

Not familiar with this but 'p' stands for premium or probability of catching Covid? So employers must pay up for workers expected to brave hazard conditions?

Yes, they will have to raise wages because of the new risk factor, Except that there is also a simultaneous reduction across the economy in the demand for labor that counters that, and it is not clear which is the stronger of the two impacts. Tyler's point is that the addition of the risk factor for work is a rapid reduction in the real, risk-adjusted compensation and that there is an asymmetry on the upside. I would add that in the future the eventual invention of a vaccine will cause a rapid increase in that risk-adjusted compensation.

How much value does a worker have who has gotten Covid and recovered?

Probably not much without some reliable authority to prove the claim is true.

plural noun: wages
a fixed regular payment, typically paid on a daily or weekly basis, made by an employer to an employee, especially to a manual or unskilled worker.

Even the term "total compensation" which is used when things like stock options are in the picture only includes numbers that are potentially taxable

"WAGES aren't sticky, because wages remain IDENTICAL, but other aspects of work have changed!"

GENIUS! The whole point is that we inefficiently alter other aspects of compensation or work environment instead of more efficiently simply adjusting wages. This is utter stupidity by conflating wages with work environment and total compensation.

I hate to break this to you, but the Federal minimum wage for tipped labor is $2.13 per hour (plus tips), and most of that goes to taxes. In principle employers are obliged to make tipped laborers whole if tips don't bring them up to the ordinary minimum wage; in practice this is uneven at best. Even without the increased probability of infection, waiters' wages would have dropped enormously.

Comments for this post are closed