Nominal Rigidity of What?
By Bryan Caplan
During recessions, hourly pay for realtors and salesmen falls rapidly. Even if they’re largely paid on commission, their unemployment still spikes. Doesn’t this show that blaming unemployment on nominal wage rigidity is misguided?
I think not. Labor markets for realtors and salesmen simply suffer from a slight tweak on the usual problem. In these markets, the key rigidity isn’t hourly pay. It’s the commission rate. To clear the market for realtors, for example, their commission needs to fall from the standard 6% to something far less. But strangely, it doesn’t. Despite a little discounting, the traditional 6% commission is very stable.
Workers in sales may be horrified by the thought of seeing their volume and their commission fall at the same time. But depending on elasticities, their hourly pay could actually rise. In recessions, salespeople waste a lot of extra time of waiting around for customers. Isn’t commission flexibility the obvious solution?