Krugman on a Wage Puzzle
By David Henderson
Paul Krugman has an excellent post today titled “Is the Great Recession Holding Down Wages? (Wonkish)“, New York Times, May 4, 2018. It appears the same day that the Bureau of Labor Statistics reports an unemployment rate that has broken below 4 percent for the first time this century.
Paul didn’t need to add the word “Wonkish.” It’s not really that wonkish. (And I wish my spell checker wouldn’t keep changing it to “Monkish.”)
Here, in his words, is the puzzle:
the unemployment rate is now very low by historical standards. In fact, it’s back down to 2000 levels; those were the days when employment was so full that people used to joke about the “mirror test” for employment: if your breath would fog a mirror, that is, if you were alive, you could get hired. (Sorry, zombies.) Yet wage growth remains restrained, well below pre-crisis levels:
And here’s key background for his tentative explanation:
The notion that firms are very reluctant to cut wages has a long history, for a very good reason: it’s true. That truth has been obvious to many observers; Truman Bewley made a systematic survey to confirm the point. Employers believe that actual wage cuts, as opposed to, say, letting real wages erode via inflation, are demoralizing and perceived as unfair. So there tends to be a zero lower bound on wage changes, except in the face of very high unemployment.
Co-blogger Bryan Caplan has in the past highly recommended Bewley’s book.
Now to his tentative hypothesis:
OK, here’s my theory about the brontosaurus, I mean, about wages. What employers learned during the long slump is that you can’t cut wages even when people are desperate for jobs; they also learned that extended periods in which you would cut wages if you could are a lot more likely than they used to believe. This makes them reluctant to grant wage increases even in good times, because they know they’ll be stuck with those wages if the economy turns bad again.
And, as a bonus, another datum that fits his hypothesis:
This hypothesis also explains something else that’s been puzzling me: widespread anecdotes about employers trying to attract workers with signing bonuses rather than higher wages. A signing bonus is a one-time cost; a higher wage, we now know, is more or less forever.
I had been puzzled about this too. But Krugman’s explanation gave me an “ah-hah” moment.
Here’s one thing I’m wondering about those bonuses, though. Let’s say you give an employee a $2,000 signing bonus. What’s to stop him from taking it, showing up for a couple of months (or even less), and then quitting? What I would like to see is how the payment of the bonus is structured. Is it pro-rated over, say, 6 months, so that the bonus per month is $333 and the moral hazard is avoided? Does anyone reading this know the answer?
By the way, Krugman’s line in the first quote about the “mirror test” reminds me of two things. First, my Hoover colleague Richard Epstein had a great line at about the 18:00 point of this interview: “Now you see signs ‘Criminals, please apply.'” LOL.
Second, I’ve been having trouble having my print Wall Street Journal delivered in the last few weeks. They’ve missed days and sometimes got to me as late as the afternoon. (I like to read it with my morning coffee.) When I told the woman at the Journal on the phone the other day that I had been so happy with the deliverer until recently and, as a result, had given him a $20 as a late Christmas bonus, she confessed that with the unemployment rate as low as it is, it is hard keeping good people.
HT2 Tyler Cowen.