Tyler on Wage Stickiness: A Quick Note
By Bryan Caplan
While I was away in Atlanta, Tyler asked, “How sticky are wages today?” His doubts:
Keep in mind that unemployment rates today are disproportionately
concentrated in low-income and low-education workers. Haven’t we been
told, for years, that these same individuals are seeing some mix of
stagnant and eroding wages? That they are experiencing downward
mobility? That the real value of health care benefits has been falling
and that more and more jobs don’t offer health care benefits at all?
Doesn’t that mean…um…their wages aren’t so sticky downwards? And thus Keynesian economics is not the final story?
The obvious responses:
1. The erosion we’ve been told about for years is supposed to have taken years to happen. Three or four decades, actually. Even staunch Keynesians probably think that the labor market could right itself over such a long timespan.
2. This erosion took place alongside positive inflation, year after year. It’s perfectly consistent with complete nominal rigidity. Consider: Between January 1978 and January 2008, the CPI (set to equal 100 for 1982-4) rose from 62.5 to 211.1 – enough to reduce constant nominal wages by over 75% in real terms. Tyler mentions the real-nominal stickiness distinction later in the post, but it doesn’t enter into his analysis.
Overall, I think Tyler’s completely wrong here. Ticker-tape flexibility in the labor market wouldn’t solve all our economic problems overnight, but would quickly solve the unemployment problem. And in terms of the human cost – not to mention the political economy of crisis – unemployment is problem Numero Uno to solve. Instead of questioning the critical importance of flexible wages, free-market advocates should be pointing out the many government policies that make wages stickier. Government isn’t the only source of wage rigidity, but it is an important one – and the only one that can be remedied with the stroke of a pen.