How Sticky Are Nominal Wages?
By Arnold Kling
The broadest measure of employee compensation is called the employment cost index. It includes the cost of benefits, such as health insurance. It is available quarterly, starting in the first quarter of 2001. I used the private sector worker ECI.
The usual measure of prices is the consumer price index.
Here are data on the cumulative rate of change of these measures over two time periods:
|Series||2001 Q1 – 2006 Q1||2006 Q1 – 2011 Q1|
|Employment Cost Index||
|Consumer Price Index||13.4 %||11.4 %|
If we compare the first period to the second, we see that wage growth decelerated much more sharply than prices. Which is exactly the opposite of what textbook models predict. In the current recession, wages were not sticky relative to prices.
Of course, you can always complain about measurement problems in the Consumer Price Index. Or you can say that the “true” (or New) Keynesian model does not depend on sticky wages, because it uses sticky prices. But if you pick the New Keynesian story, then using nominal GDP to measure aggregate demand becomes utterly vacuous. At that point, you are basically saying that “real GDP falls because real GDP falls.” I give Scott Sumner credit for not stooping to that level.
Since the financial crisis, productivity growth has been pretty good, and it has exceeded real wage growth, which has been zero. Of course, you can always rescue the AD story by saying that, well, wage growth should have been even less, because of weak AD. Just as you can always rescue the stimulus story by saying that, well, job growth would have been even stronger if we had not had the stimulus.
I cannot argue against these sorts of hypotheticals. Macroeconomic data will never be enough to convince a motivated skeptic to change his mind. They can be read too many different ways.
UPDATE: Since a commenter asked, here are the figures using 2008 Q3 as the endpoint:
|Series||2001 Q1 – 2008 Q3||2008 Q3 – 2011 Q1|
|Employment Cost Index||27.8 %||5.5 %|
|Consumer Price Index||24.5 %||3.3 %|
Using this endpoint, the recession and the preceding recovery look fairly similar to one another. During both, real wages crept up at an annual rate of less than one percent, which was far less than the increase in productivity. Again, one is welcome to dispute the CPI as a measure of price changes.