How Wage Rigidity is Special
By Bryan Caplan
Both nominal wages and nominal housing prices are what economists call “downwardly inflexible.” In most markets, falling demand swiftly leads to falling prices, and surpluses don’t last long. But in labor and housing markets, market adjustment to negative demand shocks is far more reluctant.
There are plenty of regulations that exacerbate the problem, of course. But the main cause in both cases seems to be psychological. Workers resent nominal wages cuts, and resentful workers are unproductive workers. Home owners resent selling their home for less than they think it’s “really worth,” especially if they’re already underwater.
And yet there’s one important asymmetry between labor and housing markets. In housing markets, sellers really do have a foolproof way to sell an unwanted house: Cut their asking price. Just going 10% below the price the typical stubborn seller insists upon usually does the trick.
In labor markets, in contrast, this seemingly foolproof method is strangely ineffective. Unless I’m sadly misinformed, saying “I’ll happily work for 10% less than you’re offering” simply isn’t a good interviewing strategy. It might work. But it also makes you sound weird. Net effect on your probability of landing a job: Unclear. Net effect on your expected income: negative.
1. Do housing and labor markets really work as I describe?
2. If so, why the asymmetry? Why is human psychology so easy to unilaterally circumvent in housing markets, but so hard to escape in labor markets?