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Some Help With A Sticky Situation, Wage Edition…

February 8th, 2014 · 4 Comments
Macroeconomics

So, Paul Krugman wrote a blog post that generated the following comment:

Theoretically, it is possible you think about your intended audience. You owe it to the readership of your columns and blog posts (all of whom pay for the opportunity to read them) to identify your intended audience, if you have one. That you may very well have one, or an inchoate one that you do not define for yourself explicitly, is indicated by your use of the rubric “wonkish” for some posts.

Which brings us to today. What is the intended audience of your post which begins,

“David Glasner has a thoughtful post about wage stickiness, a favorite topic of mine. And he is partially right in suggesting that there has been a bit of a role reversal regarding the role of sticky wages in recessions: Keynes asserted that wage flexibility would not help, but Keynes’s self-proclaimed heirs ended up putting downward nominal wage rigidity at the core of their analysis,”?

The intended audience of this introduction must be a group of people who immediately understand what “wage stickiness” and “downward nominal wage rigidity” are. The intersection of that group and the readership of the Times I argue must be tiny.

On one hand, I do sympathize in general regarding the casual use of terminology- I mean, I was more than a little frustrated when I came into the first day of graduate macroeconomics and began supposedly exploring the question “Is money neutral?” and instead pondering what on earth it could possibly mean for money to be neutral…after all, it *does* appear that money really likes to be in Swiss bank accounts, but I at least knew enough to get that that is not the situation that my professor was referring to. (Spoiler alert: Money being neutral means that the amount of nominal currency in an economy doesn’t have an affect on real variables such as physical output, unemployment, etc.) On the other hand, at least some of the terms used above have definitions that can be inferred from just knowing the English meanings of the words, so come on.

Take “downward nominal wage rigidity,” for example. From dictionary.com:

downward down·ward [doun-werd]
adjective
moving or tending to a lower place or condition.

nominal nom·i·nal [nom-uh-nl]
adjective
(of money, income, or the like) measured in an amount rather than in real value: Nominal wages have risen 50 percent, but real wages are down because of inflation.

wage [weyj]
noun
Often, wages. money that is paid or received for work or services, as by the hour, day, or week. Compare living wage, minimum wage.

rigid rig·id [rij-id]
adjective
firmly fixed or set.

From this, it’s really not a huge leap to infer that “downward nominal wage rigidity” refers to a situation where it’s difficult to adjust wages downwards in dollar terms. I suppose “sticky wages” is less clear as a phrase, but, in context, it’s specifically used to contrast with “flexible wages,” so it doesn’t take a genius to figure out that sticky wages are wages that are not flexible or adjustable, i.e. wages that exhibit (usually downward) nominal wage rigidity. Or, you could, you know, google “sticky wages” and get this. In picture form, sticky wages imply that it’s hard to do this:

Or this…

Since a wage is just a price on labor, it’s probably not very surprising that prices can be sticky too…I think this sums up the sticky price situation nicely:

Now that we’ve got our nomenclature settled, let’s discuss for a bit why the possibility of (downwardly) sticky wages is relevant to the analysis of business cycles. As it turns out, prices, although somewhat sticky for various logistical reasons, tend to not be as sticky as wages, so prices of output in an economy tend to adjust faster than the prices of the inputs that make that output. Therefore, the typical textbook theory goes as follows: when prices go up due to an increase in aggregate demand in an economy, there is a period of time before the costs of production catch up where it becomes more profitable to produce and producers increase output. Conversely, when prices go down due to a decrease in aggregate demand in an economy, there is a period of time before the costs of production adjust in tandem where it becomes less profitable to produce and producers decrease output. This decrease in production leads to unemployment. If there is downward nominal wage rigidity, this unemployment can persist for a long time. Now, it seems somewhat intuitive that a reduction in nominal wages would solve this unemployment problem, but Krugman actually states that he doubts that such a change would be effective. He does, however, believe that sticky wages exist and have an effect on the economy, but more in this sort of way:

In other words, there must be some force that is preventing wages from adjusting to bring the supply (S) and demand (D) of labor into balance and relieve unemployment. In related news, there really is a meme for everything.

Tags: Macroeconomics

4 responses so far ↓

  • 1 Omar Mbye // Feb 10, 2014 at 9:30 am

    Nice topic, u r good

  • 2 Will // Feb 10, 2014 at 10:39 am

    So rather than be a good economist and get into a discussion of the economics, I should just say that it’s not true that everyone pays for reading the NYT, thanks to the incognito windows in Chrome.

  • 3 Jeff // Feb 11, 2014 at 7:52 pm

    Thanks for the link. I responded to the blog post.

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