Economists Do It With Models

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Economists Do It With Strippers, Inflation Edition…

November 18th, 2013 · 1 Comment
Behavioral Econ · Macroeconomics

I apparently have the approximate maturity level of a 12-year-old boy, since I cannot stop laughing at this:

I think part of my amusement comes from the fact that Tyler Cowen took up the cause of overthinking Zach’s cartoons, and there are some choice comments on that post. In case you don’t have time to read them all, just know that the best ones focus on the demand for $2 bills by strip club owners and a perfectly reasonable, in my opinion, speculation regarding the degree to which Canadian strippers jingle, and there are plenty of bad puns involving concepts such as “convexity” and “sticky wages.” (In related news, I’m a tad bitter than I didn’t think of the puns first.)

Tyler’s overall point is that strippers may actually prefer inflation:

Let’s say the standard tip is a dollar, and price inflation lowers the real value of that dollar. A lot of customers won’t substitute into stuffing $1.43 into the stripper’s garments. They might do two or three singles, but strippers will be shortchanged at various points going up the price pole. There is something about handing out a single bill that is easier and more transparent, or so it seems.

Say inflation gets high, or runs on for a long time for a large cumulative effect. At some point the customers switch to giving $5 bills.

Does it help strippers if the Fed issues lots of $2 bills? Well, the leap up to the larger tip comes more quickly, but the customers also stay at the $2 tip level a long time before moving up to $5.

At some margins inflation is bad for current strippers, but good for some set of future strippers. If the economy is close to the margin where individuals upgrade from a $1 tip to a $5 tip, then inflation is good for current strippers but bad for future strippers (for a while).

I think now is an excellent time for a discussion on nominal versus real wages. Nominal wages, which are what most of us are used to thinking about, are just the actual nominal-currency-denominated wages that a worker receives. Real wages, on the other hand, are wages that are denominated in terms of the amount of stuff that the worker can buy with the compensation. Put a bit more simply, real wages are inflation-adjusted wages. In order for the situation illustrated above to actually occur (and in order for Tyler’s argument to make sense), the consumers in the stripper market must have an interest in keeping strippers’ effective real wages stable in the face of inflation.

One reason that consumers might make strippers’ wages keep up with inflation is because they are worried that there will be fewer (or lower quality) strippers if real wages decrease. Of course, this line of reasoning requires the employment choices of strippers to be based on real as opposed to nominal wages. I have no data on whether strippers are more or less rational than the average person, but I do know that people are generally subject to money illusion, which causes their decisions to be biased by nominal as opposed to real values. For example, consider the following experiment:

(I couldn’t easily find an electronic version of the paper, so you get a photo of the hard copy, complete with my chicken scratch from when I was studying for my qualifying exams. Forgive my comment for being slightly idiotic in retrospect.) People seem to understand real versus nominal wages to some degree when specifically asked about them, but they aren’t good at using the real quantities when thinking about happiness or choices. This is, in part, why economists sometimes claim that a society can inflate its way out of a recession- if nominal wages don’t change and inflation is present, real wages decrease…but, if nominal wages don’t decrease, people likely won’t stop working. If businesses are better at thinking in real terms (not entirely convinced that they would be, since companies are made up of people, but go with me here), then they will be more willing to hire and produce more when inflation is present because real wages are lower and the price of the firm’s output is increasing. (The context of this discussion gives a whole new connotation to inflation having a stimulative effect.) By this logic, strippers likely should be wary of inflation, not for the reason illustrated above but due to the fact that it may instead lower their real wages. On the up side for some, however, lower real wages generally mean that will be more employment opportunities for strippers.*

In related news, the Consumerist proposes a savings strategy that is likely to be problematic for strippers…until Tyler’s hypothesized effect of inflation transpire at least.

* Technically, strippers are usually independent contractors who pay a commission to the club for use of the stage. And yes, this probably means that your favorite stripper knows more about business than you do. 🙂

Tags: Behavioral Econ · Macroeconomics

1 response so far ↓

  • 1 Jeff // Nov 18, 2013 at 7:21 pm

    In addition to nominal wages and real wages, which reflect how much wages will buy, you also have wages as a fraction of revenues, which determine in aggregate what percentage of demand comes out of current private wages.

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