Sticky wages really do explain the recent recession

From a study by Mary Daly and Bart Hobijn at the San Francisco Fed:

Although our model simulations are not intended to match the data, they are remarkably consistent with data on both individual level wage changes and the dynamics of unemployment and wage growth observed for the U.S. since the 2007 recession. To show this, we update the results from Card and Hyslop (1997) and compare the changes in the histogram of log nominal wage changes between before the recession in 2006 and after the recession in 2011 with the changes in the distribution of log nominal wage changes implied by our model along its transition path.

In addition, we construct a U.S. wage Phillips curve for 1986-2012 and show that, since 2007, (i) unemployment first rose significantly while wage growth remained flat and (ii) subsequently fell while wage growth decelerated. This is consistent with the two ways in which downward nominal wage rigidities bend the Phillips curve following a large negative demand shock in our model.

We interpret these results as evidence that downward nominal wage rigidities have been an important force shaping the dynamics of unemployment, wage growth, and inflation over the period from 2006-2012.

File under further confirmation of the “musical chairs” model.

PS.  Saturos sent me an excellent FT piece by Chris Giles.  But I’d quibble slightly with this:

With the annual growth rate of nominal GDP being so important, it is extremely disappointing that Mark Carney, incoming governor of the BoE, has backed-away from his suggestion that targeting its value would help in a depressed environment.

I think the real problem here is that Cameron and Osborne didn’t give the BoE an NGDP target.  Without that sort of explicit mandate, it’s awful hard for Osborne to suddenly shift BoE policy so radically.  Perhaps the government felt that abandoning the 2% inflation target it would be too controversial, especially with Ed Balls insisting that the 2% target should be maintained.  Why is Balls so opposed to higher AD?

And Britmouse wonders why Paul Krugman is calling for fiscal stimulus, rather than a higher inflation target in Britain.



15 Responses to “Sticky wages really do explain the recent recession”

  1. Gravatar of J J
    27. April 2013 at 09:11

    Krugman places a strong emphasis on what will work in our world, not in an ideal one. Perhaps, since the BoJ failed so miserably to raise inflation, Krugman gave up hope in monetary policy at the ZLB. Maybe, after this decade he will understand that it is politically infeasible to pass fiscal stimulus on a large-scale, and will go back to advocating for unconventional monetary policy at the ZLB.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. April 2013 at 09:32

    Krugman is so intent on making Ken and Carmen into Enemies of the People he doesn’t have time for economics.

  3. Gravatar of marcus nunes marcus nunes
    27. April 2013 at 09:33

    But Japan used fiscal stimulus on steroids and nothing much happened. Could it be because MP was contractionary (almost) throughout?

  4. Gravatar of Morgan Warstler Morgan Warstler
    27. April 2013 at 09:42

    We can fix it all with Guaranteed Income and Choose Your Boss…

  5. Gravatar of Negation of Ideology Negation of Ideology
    27. April 2013 at 10:50

    Morgan –

    I’ve read your plan many times, and I think it’s well thought out and quite possibly an improvement over the current system. But why do you include this rule:

    “4.Bidders and auctioned cannot be related or cohabitating.”

    What would be the harm of a husband hiring his stay at home wife for day care? Wouldn’t that be the ultimate “Choose Your Boss” plan? In my neighborhood, several wives stay home with the kids, and it would be easy for us all to hire each other’s wives for day care under your plan.

    I ask because I think sometimes there is a bias in favor of working for others for pay, and against the great value of raising children, volunteering at the local school, working on your own property, etc. I generally don’t apporove of subsidizing day care unless there is an equal subsidy for those who take care of their own children.

  6. Gravatar of Tom Tom
    27. April 2013 at 10:54

    Krugman is almost always calling for fiscal stimulus.
    Wasn’t he calling for bigger gov’t in the 2003-2006/8 house bubble time under Bush?
    Of course, his key complaint then was against the Bush Tax Cuts.

    Krugman’s prior opposition is why the Tax Cut fiscal stimulus that might work won’t be pushed by Dems, but if it was, Reps would be more favorable to fiscal stimulus. As long as it’s bigger gov’t boondoggle spending to increase crony capitalism, Reps are right to be strongly against it.

    Insofar as QEx is a monetary policy designed to achieve growth without reducing crony stimulus, it’s hard to be sure that Reps are wrong to oppose it.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. April 2013 at 10:55

    From Daly and Hobijn;

    ‘…three things stand out. First, the fraction of workers with no wage change increased substantially in 2011 relative to 2006. In 2006 about 12 percent of workers reported zero wage change; in 2011 the share had risen to about 16 percent. This 16 percent is the highest level of the spike at zero for all the 32 years for which we have CPS data.

    ‘Second, the fraction of workers getting a wage increase declined noticeably over the period and the size of wage increases, conditional on getting one, was substantially lower in 2011 than in 2006. Thus, there is notable compression of wage gains near zero, suggesting that the inability to adjust nominal wages downward may influence the magnitude of wage increases. This is a point made by Elsby (2009).

    Finally and surprisingly, there is little difference in the fraction of workers that get wage cuts between 2006 and 2011.’

    Adam Smith validated once again! When prices aren’t free to fluctuate, surplus and shortage result. Maybe Krugman should spend some time using his influence with VSOPs to get them to do what they can to relieve these rigidities.

  8. Gravatar of Carl Carl
    27. April 2013 at 11:27

    Good evidence of sticky wages, but I’ve always found it odd that anyone would think that wages weren’t sticky. I mean who ever gets excited about a pay cut and how easy is it renegotiate contracts?

    My concern is with sticky federal programs which not only increase but are made stickier with each downturn.

  9. Gravatar of ssumner ssumner
    27. April 2013 at 12:23

    J, But the BoJ never tried to raise inflation above zero. In contrast the fiscal authorities in Japan did try to boost AD, and failed.

  10. Gravatar of J J
    27. April 2013 at 15:25

    Negation of Ideology,

    If the plan includes the government subsidizing part of the wage or matching the wage in any way, then obviously there are moral hazard issues. I hire myself (or my wife) to stay at home and do nothing and the government contributes.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. April 2013 at 16:06

    ‘If the plan includes the government subsidizing part of the wage or matching the wage in any way, then obviously there are moral hazard issues.’

    Any more than the current moral hazards created by government?

  12. Gravatar of Steve Steve
    27. April 2013 at 16:22

    Record setting case of the pot calling the kettle black!

    Krugman on Reinhart and Rogoff: “I’d say that they’re still trying to have it both ways”

    The irony here is that both Rogoff and Krugman have called for higher inflation in recent years. So on paper they should agree. But Rogoff thinks the deficits require austerity, and Krugman thinks the economy requires increased deficits. This is your brain on politics.

  13. Gravatar of ssumner ssumner
    28. April 2013 at 07:38

    Thanks Steve.

  14. Gravatar of Geoff Geoff
    28. April 2013 at 12:11

    The same data also confirms the theory that higher wage payments cause higher spending and thus higher NGDP, ceteris paribus.

  15. Gravatar of ssumner ssumner
    29. April 2013 at 17:11

    Geoff, No, the data doesn’t confirm that theory.

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