Aggregate wages are sticky, individual wages don’t (much) matter

Tyler Cowen discusses a large study of panel data on wage changes, which suggests nominal wages are less sticky than many have assumed.

There are some issues with the data.  The US sample is self-reported, and some of the wage changes do not reflect hourly rates.  But let’s assume that the broad conclusions are accurate.  Does this follow?

This paper does not show nominal wages to be fully flexible, nor does it show that observed nominal wage changes were “enough” to re-equilibrate labor markets.  Still, this paper should serve as a useful corrective to excess reliance on the sticky nominal wage hypothesis.  Nominal wage stickiness is a matter of degree and perhaps we need to turn the dial back a bit on this one.

I disagree with this claim, mostly because the stickiness that matters is not at the individual level, but at the aggregate level.  Indeed it would be theoretically possible for individual wages to be highly flexible and aggregate wages to remain very sticky.

During a recession like 2008-09, NGDP growth fell 9% below trend, while nominal wage growth was little changed.  W/NGDP soared.  Using my musical chairs model, we’d expect about 9% fewer hours worked.

I can already anticipate your objection:  “Yes, but that doesn’t prove causation.”  True.  For instance, if the Fed had kept NGDP growing at 5%, instead of falling by 4%, perhaps nominal wages would have risen by 13%, instead of 4%.  In that case the ratio of W/NGDP still would have soared 9% higher, unemployment would have skyrocketed, but there would have been no NGDP shock.  So maybe sticky wages are not the problem.

Yes, that sort of counterfactual would disprove my musical chairs model.  And I don’t doubt that something like that has occurred somewhere.  Indeed something like that occurred in the US during July through September 1933, due to FDR’s (NIRA) policy of raising nominal wages by 20%.   But I don’t believe this sort of thing occurs very often, especially in a large diversified market economy such as the US.  I’ll believe it when I see it.  Until then I’ll continue to assume that had the Fed kept NGDP rising at 5%, nominal wage growth would not have soared to 13%, and unemployment would have risen much less sharply.

There are academic models that show even a small amount of nominal wage and price stickiness at the individual level, can lead to surprisingly large aggregate stickiness.  And the study cited by Tyler shows unambiguously that nominal wage stickiness does occur at the individual level.  The spike on the wage gain graph at “0% nominal wage increases” is the smoking gun.  It’s true that that spike is modest in size, but it doesn’t have to be large, as most workers who got non-zero pay increases also tend to earn non-equilibrium wages.

Tyler also makes this claim:

Note also that this paper need not discriminate against neo-Keynesian and monetarist theories, though it will point our attention toward “zero marginal revenue product” versions of the argument, in which case the flexibility of nominal wages simply doesn’t help much.

I completely agree that the flexibility of individual nominal wages doesn’t help all that much, although a comparison of Hong Kong and Spain suggests that it does help some.  Sticky wages are a background assumption, like gravity.  When a bridge collapses, you don’t look for ways to make gravity less important in that locale (by shifting the Earth’s mass to other regions) you build a stronger bridge.  Wage stickiness will always be with us, the solution is more stable NGDP growth.

If you want to show that wage stickiness is the not the main problem, then find those examples where workers are granted 13% pay raises when NGDP growth is running at 5%.  They should be out there.  After all, my critics claim that the huge spike in W/NGDP in 2009 was not caused by falling NGDP.  I.e. that W/NGDP would still have shot up if NGDP growth had been steady.

Until then, I’ll continue to believe that the musical chairs model featuring sticky aggregate wages (not necessarily sticky individual wages) is the best way to explain cycles in unemployment.


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58 Responses to “Aggregate wages are sticky, individual wages don’t (much) matter”

  1. Gravatar of Apenomics Apenomics
    13. June 2013 at 10:49

    Economic scholars really live in the abstract world of their own.

    If they only believed in aggregate wages made up by their own numbers that pleases them. Sticky wages are not assumptions, they are the little bits that the corrupted wants to ignore so that they can force their objectives to be implemented – stealing wealth through means of inflation.

    I mean which employer doesn’t want wages to be sticky as long as no law forbids them to do so while they continually manipulate the money supply towards their own advantage?
    The savings come from less payouts to their staffs while they still rake in the same profits(in terms of value with price adjustments/switching currencies for trades).

    2 keypoints and important facts:

    1) Governments taxes the people more by stealing the value of their hard earned savings.
    2) Employers can take advantage of their country’s currency devaluation by holding back their staffs pay increments to announce higher annual net profit gains.

  2. Gravatar of Edward Edward
    13. June 2013 at 10:49

    “When a bridge collapses, you don’t look for ways to make gravity less important in that locale (by shifting the Earth’s mass to other regions) you build a stronger bridge. Wage stickiness will always be with us, the solution is more stable NGDP growth.”

    Beautiful. This is what imbeciles like Geoff, Major Freedom, and the rest of the Austrians do not understand

  3. Gravatar of George Selgin George Selgin
    13. June 2013 at 10:57

    It seems to me, Scott, that the significance of the findings is, not to suggest that in formulating optimal policies or arrangements, we should dispense with the assumption that (aggregate) wage stickiness exists, but to cast doubt on the view that such stickiness has been so extreme or persistent as to make lack of demand a highly likely cause of high unemployment several years after a major adverse demand shock, and despite substantial upward progress in the meantime in both the level and growth rate of NGDP. _Eventually_ the short of downward adjustments that the study describes should go some way toward bridging the gap, that may remain between the newly raised level of NGDP and where that level might be had there been no collapse. The evidence, in other words, goes to the possibility I raised some months back (along with the complementary one of gradually declining, that is to say, less than rigid, NGDP expectations), to wit, that there is no longer a shortage of spending, notwithstanding that it is not yet back on its former trend, and that the source of persistent labor market woes is mainly a reflection of factors other than an excess demand for money. John Cochrane’s recent post offers complementary reasons for wondering whether, in this country at least, additional QE is the right medicine.

  4. Gravatar of George Selgin George Selgin
    13. June 2013 at 10:58

    It seems to me, Scott, that the significance of the findings is, not to suggest that in formulating optimal policies or arrangements, we should dispense with the assumption that (aggregate) wage stickiness exists, but to cast doubt on the view that such stickiness has been so extreme or persistent as to make lack of demand a highly likely cause of high unemployment several years after a major adverse demand shock, and despite substantial upward progress in the meantime in both the level and growth rate of NGDP. _Eventually_ the sort of downward adjustments that the study describes should go some way toward bridging the gap, that may remain between the newly raised level of NGDP and where that level might be had there been no collapse. The evidence, in other words, goes to the possibility I raised some months back (along with the complementary one of gradually declining, that is to say, less than rigid, NGDP expectations), to wit, that there is no longer a shortage of spending, notwithstanding that it is not yet back on its former trend, and that the source of persistent labor market woes is mainly a reflection of factors other than an excess demand for money. John Cochrane’s recent post offers complementary reasons for wondering whether, in this country at least, additional QE is the right medicine.

  5. Gravatar of George Selgin George Selgin
    13. June 2013 at 11:01

    Sorry for the inadvertent double posting.

  6. Gravatar of Apenomics Apenomics
    13. June 2013 at 11:07

    Edward, how about the excuse of diverting people way from the fact that inflation is actually an act of stealing wealth away from the people’s hard earned stash?

    Create confusion, then accuse others of not understanding them.Furthermore calling them names?

    It’s easy to talk gibberish in front of a general crowd, then the crowd goes “huh”?Do you blame yourself of not making it clear enough to the crowd or it’s not your fault because they are not bright enough to comprehend your speech?

  7. Gravatar of John John
    13. June 2013 at 11:14

    Wages have not always been sticky. Look at the old workhorse of the Austrians, the recession of 1920-21 for evidence.

    Apenomics,

    If it were true that employers could hold back wages (real in your argument) as much as they wanted, why don’t brain surgeons make minimum wage? Why does pay for skilled professions increase faster than inflation in general?

    Scott,

    The aggregate is made up of individuals. Could you explain how it is theoretically possible for all actors involved to be willing to move wages around but have sticky wages matter in aggregate?

  8. Gravatar of Saturos Saturos
    13. June 2013 at 11:17

    I don’t think it’s at all clear that a 0% change in everyone’s wages is equivalent to everyone’s wages moving in different directions and cancelling out, in the amount of unemployment produced. It would depend on the various cross-elasticities of demand, for goods and for workers, wouldn’t it? How are you so sure that all individual wage change combinations are equivalent while their aggregate effect is constant?

  9. Gravatar of Andrew M Andrew M
    13. June 2013 at 11:25

    If you have your life savings under your pillow, inflation may be an issue for you, sure. Since most Americans have their savings to investment vehicles that at least partially adjust for inflation, I would suggest reconsidering your portfolio choices. Wait, scratch that, just buy gold.

  10. Gravatar of Edward Lambert Edward Lambert
    13. June 2013 at 11:28

    “Until then I’ll continue to assume that had the Fed kept NGDP rising at 5%, nominal wage growth would not have soared to 13%,”

    How can the Fed keep NGDP rising when the mechanism to transfer liquidity from capital to labor has broken down. In order to have NGDP growth, you have to have growth in nominal wages.
    Inflation is determined by labor’s share of national income, which is the basis of demand for finished products.
    The natural rate of interest for capital is around 6%. The natural rate of interest for labor is around 1%. Labor is liquidity starved.
    When the natural rate of interest is so low for labor, it means that they don’t have liquidity to generate inflation.
    Capital is able to supply products much faster than labor is able to respond with demand. It was the opposite back in the 70’s when labor had the higher natural rate of interest. Labor was able to respond with demand faster than capital could supply the products. This led to volatile inflation. In the 80’s, the volatility of inflation was controlled the moment that labor’s natural rate fell below capital’s. And since then, labor’s natural rate of interest has continued to fall bringing down inflation with it.

    How can NGDP targeting raise labor’s share in order to raise inflation? You need a mechanism if NGDP targeting is going to work. and as we can see in this graph from the G7, inflation is falling not just here, but everywhere that labor’s share is falling.
    http://fingfx.thomsonreuters.com/2013/06/13/151732a052.htm

  11. Gravatar of Geoff Geoff
    13. June 2013 at 11:45

    Dr. Sumner:

    “I disagree with this claim, mostly because the stickiness that matters is not at the individual level, but at the aggregate level. Indeed it would be theoretically possible for individual wages to be highly flexible and aggregate wages to remain very sticky.”

    This is logically impossible.

    If x1 is flexible, if x2 is flexible, if x3 is flexible, … , if xn is flexible, then X = x1 + x2 + x3 + … xn, is flexible.

    Aggregate wages is just the sum of individual wages.

    I suspect what might be the idea here. If the first half of random sample x’s are flexible in the upwards direction, and decrease flexibly, but the second half of random sample x’s are flexible in the downwards direction, and increase flexibly, then aggregate wages here would be unchanged, and so we have a situation where individual wages are flexible, but aggregate wages are perfectly inflexible.

    The problem with this aggregate thinking is that it does not stand as an explanation for why aggregate unemployment rises in the midst of a spending collapse. For if the first half of random sample x’s decline, then the actual explanation for why unemployment increased, would be due to the lack of decline in wages in the other random sample half. It’s not “aggregate” wage stickiness that is the issue, but rather the fact that individual wage rates in their respective industries and firms are not able to be reduced adequately.

    ————–

    Edward:

    “When a bridge collapses, you don’t look for ways to make gravity less important in that locale (by shifting the Earth’s mass to other regions) you build a stronger bridge. Wage stickiness will always be with us, the solution is more stable NGDP growth.”

    “Beautiful. This is what imbeciles like Geoff, Major Freedom, and the rest of the Austrians do not understand.”

    What, that we don’t treat the economy as a physical machine where there is no presupposed consciousnesses anywhere, but rather understand it as activity characterized by individual, purposeful human action in a division of labor?

    Oh how “imbecilic” of us to regard individuals as conscious beings with their own knowledge and economic plans. How dare us refuse to think of the economy in terms of constant equations as do chemists in the lab.

    The fact that you are impressed by misguided analogies and platitudes only reinforces my conviction that you don’t think like an economist, but rather as some chip-on-his-shoulder chemistry lab intern with an attitude problem.

    To address the point that is sloppily being analogized here, to use actual economic principles, the solution is not to distort economic calculation via funny money dilution, deluding investors and consumers into setting inefficient wages in physically unsustainable projects. Oh I’m sorry, I meant the solution is not to “stabilize NGDP”.

    If a bridge collapses, then the last thing to do is to make the bridge builders believe that they have more bricks and mortar than will actually be available to them, which is exactly what happens when the Federal Reserve System inflates and expands credit beyond what the free market would have otherwise allowed.

    Couple this with the “dog chasing his own tail” issue you inflationists don’t seem to be able to grasp when it comes to the relationship between inflation and wage stickiness, and we have the same thing that is always the case when the socialist minded demagogues like you confront it: You perceive a problem that doesn’t exist, you propose a “solution” that will only make things worse, and then when the outcome is contrary to your desired plan, you blame the non-existent society that is composed of your non-activity, and then you use that fictitious outcome to justify continued activity that keeps making things worse.

    I could not imagine a more misguided and quite frankly ignorant approach to the economy. It’s like you people are purposefully keeping yourselves ignorant because you can’t intellectually or psychologically handle the fact that your worldview is utterly fallacious.

    You don’t even understand the basic fact that wage rates are not self-motivated, so to even describe wage rates as sticky, or flexible, or this or that, without referring to the individuals who choose such wages, or who are prevented from setting preferable wages for whatever reason, again just reinforced my conviction that you don’t think like an economist.

    You people are accountants and historians, who have little understanding of markets. Your understanding derives from a blind and sloppy induction from historical data, because you lack the intellectual capacity to approach the data with a proper theory.

  12. Gravatar of Joe Eagar Joe Eagar
    13. June 2013 at 11:54

    I once heard a European wonk say that Greece was a like a classical economy, where wages are flexible in nominal terms but sticky in real terms. This strikes me as much the same thing; nominal stickiness is not always the whole story.

  13. Gravatar of Edward Edward
    13. June 2013 at 12:03

    I happen to disagree with Scott here. I think wages ARE sticky downward at the individual level. So your whole rant about individuals vs the collective is meaningless. But the quote I picked was about doing things the simple vs the hard way. that’s all! Just forget about ABCT for the moment. Monetarists want to build a better bridge, Austrians want to shift the mass of the entire earth to a new locale
    And for the trillionth time, there is no reason whatsoever to think that their are less “bricks” or mortar or anything to build the bridge than what people think.
    If there was, there would be a sign of scarcity, input prices would be hiring during the boom, and it wouldn’t be “unobservable” Monetarists well understand the difference between the long and short run. Usually when something is good in the short run but bad in the long their are some indicators that one can use, even in the short run, to judge a policy wrong. There are no such indicators with ABCT. There is no, (or very little) credit economic calculation problems resulting from credit expansion. Or if there are, they are minimal, and can be avoided by a farsighted entrepreneur. So NGDPLT is good not only in the short run, but also in the long

    Apenomics, you’ve chosen an apt name for yourself. I’ve addressed the point of “stealing purchasing power” many times, you can’t steal an abstract relationship between class of goods a and goods b. Such a relationship is of course by definition, unstable.

  14. Gravatar of ssumner ssumner
    13. June 2013 at 12:12

    George, I suspect that aggregate wages are much more sticky than common sense would suggest, partly for reasons discussed in this post:

    https://www.themoneyillusion.com/?p=16463

    (I also did a post replying to some of the issues you raise a few months back, but cannot find it.)

    There are macro models that predict a very small amount of nominal stickiness at the indiviual level can lead to a high degree of aggregate stickiness. I think those models are probably right. I would add that I believe the labor market would have healed by now, if NGDP had grown on trend after the 2008-09 collase. Instead we had further adverse NGDP shocks. I’ve never seen that happen before.

    Regarding the Cochrane post, I agree with several of his points:

    1. A 6.5% unemployment threshhold is not the way to do monetary targeting. We should be targeting NGDP, not unemployment)

    2. I certainly agree that inadequate demand cannot explain the shortfall of 10 million jobs. I suspect that the actual jobs shortfall is far less than 10 million. Note that the unemployment rate (7.6%) is 2% above the Fed’s estimate of the natural rate (5.6%). There is also some uncertainty as to whether the extended UI benefits have affected the natural rate, as I’ve discussed in recent posts. No one really knows how big the jobs shortfall actually is, I suspect about 3 to 5 million, i.e. 2% to 3.5% of the workforce.

    3. I strongly disagree with his claim that monetary stimulus has failed to create many jobs. Monetary stimulus has not been tried. If we had a couple years of 5% NGDP growth (neutral monetary policy), and still didn’t get many jobs, then I’d gladly concede to Cochrane on this specific point (although I’d still argue we had demand-side unemployment when the rate was 10% in 2009. That rate has already fallen by 2.4%.)

  15. Gravatar of ssumner ssumner
    13. June 2013 at 12:25

    John, Wages were sticky in 1920-21, which is why we had a deep recession in 1921. They were less sticky than today, which partly explains why we had a fast recovery. Monetary policy was also more expansionary during 1921-23.

    As for flexible individual wages, suppose wage increases reflected industry specific factors, plus average NGDP/person growth over the past 5 years. Then individual wages would move around a lot, but aggregate wages would be very sticky.

    Saturos, I agree—was that directed at me?

    Edward Lambert, I disagree with pretty much everything you said. Even if hourly wages don’t rise, hours worked may rise.

    Joe, A lot of cutting edge models suggest that nominal and real stickiness interact in such a way as to make aggregate stickiness much worse.

    Edward, I don’t disagree with you, I think the “37% of workers got pay cuts” figure is wrong, but for the purposes of this post I assumed that the data was accurate. I doubt even 15% of workers saw their hourly wage rates cut, while still on the same job.

  16. Gravatar of jknarr jknarr
    13. June 2013 at 12:39

    Scott,
    Top-line revenue for US corporations % NGDP has been declining since 1999. Expenses have declined faster — which has boosted profit margins to near record highs. The biggest crushed expense has been labor. (IMHO, tight monetary policy crushes labor expenses more than aggregate demand, and therefore boosts profit margins.)

    The decline in labor income % revenue is a mirror image of dividends plus retained earnings (buybacks).

    You might as well ask about sticky dividends and equity buybacks, if you are going to discuss sticky labor expense.

    Also, tight policy at the Fed appears to more effectively un-stick wages, rather than damage aggregate demand/NGDP:

    Perhaps this is where the fiscal argument comes in — the UST supports aggregate demand/NGDP, provides a safety net for the unemployed and disaffected, while the Fed crushes income expenses and boosts corporate profits.

  17. Gravatar of George Selgin George Selgin
    13. June 2013 at 14:38

    I do indeed remember that earlier exchange, Scott, and you made good points then, as you do here regarding both my and John Cochrane’s observations. And yet I still think there is more to be said concerning the implications of the recent wage-flexibility study. It’s going out on a limb, I know, but here are some propositions that come to mind. (1) The greater the evidence concerning declining individual nominal wage rates, the less likely it is that significant cyclical (that is, NGDP-shortage based) unemployment exists despite increasing _average_ money wage rates; (2) to the the extent that there is cyclical unemployment, its value must tend to diminishing so long as the average wage rate continued to rise, and it should eventually disappear, notwithstanding that NGDP may remain below some former growth rate or trend.

    I leave the proofs (or disproofs, as the case may be) as an exercise for your smarter followers!

  18. Gravatar of John John
    13. June 2013 at 16:05

    Scott,

    I strongly object to your characterization that monetary policy was expansionary from 1921-1923. I think you and I would both agree that the best overall way to determine the stance of monetary policy in the distance past would be through inflation rates. Based on the rather limited data available, inflation averaged -10.5% in 1921, -6.1% in 1922, and 1.8% in 1923. 1921 was the most deflationary year ever and 21-22 were almost as deflationary as 31-32 (16.6% vs 18.9%).

    If you’re simply equating a recovery with expansionary monetary policy then fine, but don’t call it easy money! I don’t know how on earth you can plausibly argue that two years of deflation represented expansionary monetary policy. Especially when one year the deflation averaged over 10%.

    http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

    Until you firmly deal with this one it’s hard to take the sticky wage with tight money argument seriously. Since deflation hit just as hard in 21-22 as 31-32 without the same changes in output and employment, anyone reasonable would have to conclude that something different was happening on the supply-side at the start of the Great Depression.

  19. Gravatar of John John
    13. June 2013 at 16:11

    Geoff,

    “If a bridge collapses, then the last thing to do is to make the bridge builders believe that they have more bricks and mortar than will actually be available to them, which is exactly what happens when the Federal Reserve System inflates and expands credit beyond what the free market would have otherwise allowed.”

    I remember you saying once that you hadn’t read von Mises. It’s funny you use the same brick metaphor he uses to describe the business cycle in his book “Human Action.”

  20. Gravatar of Edward Lambert Edward Lambert
    13. June 2013 at 16:39

    Scott, it is true that hours worked has risen.

    As for the recession in 1921, another factor was that labor share and real wages rose during that recession. That is a powerful boost to aggregate demand that helped the recovery be so quick and supported the expansionary monetary policy, not work against it like now.

    http://effectivedemand.typepad.com/ed/2013/05/labor-share-rose-in-the-recession-of-1921-1922.html

    We have to see a boost in nominal wages now. How does NGDP targeting raise real wages?

  21. Gravatar of John John
    13. June 2013 at 17:54

    Edward,

    The reasoning their is flawed. Other things equal rising real wages mean that employers will purchase less labor than they would if wages were lower. Basic supply and demand.

    Money paid out to workers does not boost aggregate demand. Business owners had alternate choices of how to spend those funds. Wages paid to workers represent a different path of spending rather than bringing new spending and investment into the system.

    P.S. I know for a fact that Scott does not buy the type of reasoning you are trying to use here. Your argument reminds me of the ridiculous garbage Nancy Pelosi spit out about unemployment checks being the best stimulus because they were spent the quickest. No mention of the fact that it’s subsidizing unemployment. Think like an economist, in terms of tradeoffs.

  22. Gravatar of Michael Michael
    13. June 2013 at 17:58

    What struck me from a quick glance at that paper (or at least, a glance at one table in the paper):

    http://conference.nber.org/confer/2013/LMs13m/Elsby_Shin_Solon.pdf

    1. The percentage of non-hourly workers reporting negative nominal wage changes was much higher that that of hourly workers reporting same in all twelve time periods reported in Table 6. The lowest difference between non-hourly and hourly was 6.9% in 1982-1983; the greatest difference between non-hourly and hourly was 18.4% in 2007-08. I would have guessed the opposite, that hourly workers were more likely to report negative nominal wage changes than non-hourly.

    2. The rate of non-hourly workers reporting negative nominal wage changes was quite high in all time periods. It was at least 26% in every two year period since 1997-98. Leading up to the crisis it was 30.2% in 2003-04, 26.6% in 2005-06, and 37.1% in 2007-08. In 2009-10 and 2011-12 it was around 33%. Doesn’t seem like a huge change from pre-crisis.

  23. Gravatar of Edward Lambert Edward Lambert
    13. June 2013 at 18:09

    As I read your paper, “A case for NGDP targeting: Lessons from the Great depression”.

    page 7.
    “because nominal wages are adjusted at infrequent intervals, an increase in NGDP growth tends to lead to higher profits in the short run, and higher wages in the long run.”

    So you expect companies to raise their prices before wages are raised. I don’t think you realize how demand constrained prices are. A company would lose profits instead of make more.

    Also from page 14
    “An NGDP targeting regime in Britain would have depreciated the pound, and that would have reduced the current account deficit. That sort of belt tightening is appropriate. Real wages might also have fallen, slightly reducing living standards. Again, this is a painful but necessary adjustment. But these changes (a weaker pound and lower real wages) would also have led to higher employment levels. Hard work is exactly what a highly indebted entity needs, whether a household or an entire country.”

    Hard work???!!! You don’t think people are working hard enough? Real wages have been stagnant for decades. Americans work more hours than other countries.

    Ok… what I see is that NGDP targeting gives short-run profits to business through higher prices to an already income constrained labor force, and you want the labor force to work harder longer hours.

    The problem is that profits are at record-highs already, labor is still not benefiting and inflation is still falling.

  24. Gravatar of TallDave TallDave
    13. June 2013 at 18:34

    How can the Fed keep NGDP rising when the mechanism to transfer liquidity from capital to labor has broken down.

    I can’t be the only one here who got a good laugh from that 🙂

    Fun thread, thanks for sharing everyone.

  25. Gravatar of Apenomics Apenomics
    13. June 2013 at 18:35

    “If it were true that employers could hold back wages (real in your argument) as much as they wanted, why don’t brain surgeons make minimum wage? Why does pay for skilled professions increase faster than inflation in general?”

    John, if there were lot more brain surgeons around running their own consultancy clinics then they would disagree to the idea of inflation too because of stiff competition, right? How about the other skilled professionals of their own trade who have no say about their pay rises? Everyone wants to have a say in their pay increases, how do you justify growth with that when you’re just printing money and demanding more of it every time to make up the losses for its value decline?

    The truth is there are still people who wants to push for inflation because there are still those who would benefit from it. Politicians, government cronies and corporations who supports the idea of shortchanging workers.

    “If you have your life savings under your pillow, inflation may be an issue for you, sure. Since most Americans have their savings to investment vehicles that at least partially adjust for inflation, I would suggest reconsidering your portfolio choices. Wait, scratch that, just buy gold.”

    Andrew M, this is my own hard worked money which I worked for more than 50 years. If the government takes away the value of my money without my consent, I’m sure you’ll be mad too? I’m not obligated to put my blood sweat money into investment schemes which exposed myself to more risks.Why am I being pushed around to cushion myself from the mess other people have caused? Invest in gold? That’s still subjected to price manipulation.

  26. Gravatar of Ben J Ben J
    13. June 2013 at 21:43

    “If the government takes away the value of my money without my consent, I’m sure you’ll be mad too? I’m not obligated to put my blood sweat money into investment schemes which exposed myself to more risks.Why am I being pushed around to cushion myself from the mess other people have caused? Invest in gold? That’s still subjected to price manipulation.”

    Nor is any monetary authority obligated to stabilise the value of a medium of exchange and unit of account because you feel like a liquidity premium. Crying about inflation because it decreases the value of cash balances is pathetic.

    At least the intelligent Austrians come here and say that inflation causes distortion in the capital stock, and thus that money demand and supply should be left to the market.

  27. Gravatar of Apenomics Apenomics
    13. June 2013 at 22:09

    “Nor is any monetary authority obligated to stabilise the value of a medium of exchange and unit of account because you feel like a liquidity premium. Crying about inflation because it decreases the value of cash balances is pathetic.”

    Ben J, The country reserves belongs to the citizens who worked hard for it. The monetary authority is answerable to the public for their inappropriate actions.

    If the authorities are not answerable to the public for their actions or claims they are not obligated to stabilize the public’s wealth then they should do away with elections and run a dictator monarchy.

    Would that make them self proclaimed prophets?

  28. Gravatar of Ben J Ben J
    13. June 2013 at 23:49

    Apenomics,

    Nowhere have you or I talked about either reserves or wealth (money is neither), so none of what you just said makes any sense.

  29. Gravatar of Michael Michael
    14. June 2013 at 02:34

    Apenomics wrote:

    “The truth is there are still people who wants to push for inflation because there are still those who would benefit from it. Politicians, government cronies and corporations who supports the idea of shortchanging workers.”

    The truth is that the people who benefit from lower inflation are not the ones you think would benefit. The most important asset held by most average people is the value of their future labor – this is more or less an inflation protected asset. Social security income is inflation protected, that accounts for a big chunk of the average retriee’s income. Stocks and bonds will take a pounding from inflation, and that will certainly affect the average person to some extent. But who owns more stocks and bonds? Joe Average… or the “politicians, government cronies, and corporations who support the idea of shortchanging workers”. I think it is obviously the latter group who stands to benefit more from lower inflation.

    “Andrew M, this is my own hard worked money which I worked for more than 50 years. If the government takes away the value of my money without my consent, I’m sure you’ll be mad too? I’m not obligated to put my blood sweat money into investment schemes which exposed myself to more risks.Why am I being pushed around to cushion myself from the mess other people have caused? Invest in gold? That’s still subjected to price manipulation.”

    Well, first of all, nobody is entitled to a risk-free return on their investments. Attempts by the financial sector to generate such a return have contributed to the mess that we are currently stuck in. To earn money on investment, there needs to be some risk involved, and their needs to be people on the other side of your investment who will use that money productiviely. If there is an excess of investors and a shortage of productive uses of their money, returns to invetment will fall. Sound familiar?

  30. Gravatar of W. Peden W. Peden
    14. June 2013 at 03:44

    Edward Lambert,

    “Real wages have been stagnant for decades.”

    This doesn’t look like stagnation to me-

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=COMPNFB_GDPDEF&scale=Left&range=Max&cosd=1947-01-01&coed=2013-01-01&line_color=%23ff0000&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a%2Fb&fq=Quarterly&fam=avg&fgst=lin&transformation=lin_lin&vintage_date=2013-06-14_2013-06-14&revision_date=2013-06-14_2013-06-14

  31. Gravatar of Daniel Daniel
    14. June 2013 at 05:14

    John

    http://thefaintofheart.files.wordpress.com/2011/08/coolidge_6.jpg

    In conclusion

    http://static.comicvine.com/uploads/original/11/116880/2543079-how_about_a_nice_cup_of_shut_the_hell_up_card-p137715017896542298envwi_400.jpg

  32. Gravatar of Daniel Daniel
    14. June 2013 at 05:27

    I think Apenomics is making the same mistake the “austrians” make – namely, taking theories that only work for commodity money and trying to apply them to fiat money.

    Dude – fiat money is supposed to be medium of exchange/account. NOT a store of wealth.

    Can you get that through that thick head of yours ?

  33. Gravatar of Apenomics Apenomics
    14. June 2013 at 06:54

    Michael,

    ” The most important asset held by most average people is the value of their future labor”
    What is the value of future labor you speak of that people can’t see but economic scholars can?
    The average Joe sees more homeless people, soaring consumer prices, opening up gates to unwanted immigration, low population growth and birth rates.

    “Social security income is inflation protected, that accounts for a big chunk of the average retiree’s income.”
    Pension schemes and social security will be in history books for the coming generation of youths today. They’ll never enjoy what the baby boomers and Gen-Xers get to have.

    ” But who owns more stocks and bonds? Joe Average… or the “politicians, government cronies, and corporations who support the idea of shortchanging workers”. I think it is obviously the latter group who stands to benefit more from lower inflation.”
    A directly opposite related question is who gets to manipulate stocks and equities more? Who gets to adjust prices overnight for consumer shelf items if inflation happens?

    Will governments and corporation choose to trade in other stable currencies for their trade if their home currencies collapses – YES.

    Will corporations keep quiet and absorb the losses by making less if their deals are affected by their currency of choice before the inevitable? – Off course, NO.Even if the chairman agrees, the board wouldn’t in their AGMs.

    If you ask me if governments and corporations prefer lower or higher inflation, they’ll favor the money printing route. It doesn’t require legislative approval and you stealthily put your hands into the public’s pocket?

    http://thebrainetrust.com/2013/06/07/inflation-you-cant-hide-your-lyin-eyes-the-eagles/

    “Well, first of all, nobody is entitled to a risk-free return on their investments.”
    At where I live, placing my hard earned money into a retirement savings account with near ZERO interest is considered an investment?

    Financial Times Quote – 80% of Japanese people have never owned a single stock
    http://www.youtube.com/watch?v=4cWJ5931yYg

  34. Gravatar of Apenomics Apenomics
    14. June 2013 at 07:07

    I just want to add a few more sources to solidify my stance:

    Hidden Tax: How Inflation Confiscates Wealth
    http://universityofcommonsense.org/articles/how-inflation-steals-wealth/

    Bernanke Agrees That Inflation Is A Tax
    http://www.youtube.com/watch?v=D4yBrxmEOkY

  35. Gravatar of John John
    14. June 2013 at 07:08

    Daniel,

    I have no reason to believe your numbers. The numbers I found are from a site detailing inflation monthly from 1914-2013. The numbers on the site I found match those from the Federal Reserve’s database. You provided me with two shoddy graphs from someone’s blog (probably your own) then posted a rude link. You’re the one that should drink the cup of shut the hell up. People like you who make ad hominem attacks on the internet where they face no potential retribution are complete cowards.

  36. Gravatar of John John
    14. June 2013 at 07:11

    P.S. the stat’s I’m using are CPI minus food and energy. Where’d you get your numbers exactly? Also, if you’re gonna challenge my numbers at least use the right ones. Get me conflicting consumer price inflation data from the same time period.

  37. Gravatar of ssumner ssumner
    14. June 2013 at 08:15

    George, I agree that even with the current sub-normal NGDP growth track, wages do gradually adjust and the unemployment rate is gradually moving back to the natural rate–which is admittedly unobservable.

    My fear is that NGDP growth will slow even further. If I’m wrong and NGDP keeps rising at 4% then the economy will continue to grow and the unemployment rate will fall, in my view.

  38. Gravatar of ssumner ssumner
    14. June 2013 at 08:27

    jknarr, In my view you’re looking at things backward. Any impact on the labor market comes through unexpected changes in NGDP. And since wages are sticky, a slowdown in NGDP growth hurts corporations.

    If they’ve done well in recent years, it’s for reasons unrelated to monetary policy.

    John, If you look at high frequency data, you will find the deflation occurred in 1920-21, not 1921-22. From the trough in NGDP in late 1921, I seem to recall NGDP grew very fast over the next 2 years. If I’m wrong I’ll change my views.

    As you know, I think inflation data is worthless.

    Edward, The rise in real wages caused the recession of 1921.

    Michael, I simply don’t trust the data. People are stupid. When you ask them economic questions they’ll give stupid answers. I very much doubt that 37% got pay cuts. In fact I’d put money on a bet. Ask the companies if they cut hourly wages, and for what share of workers. The answer will be different.

    Edward, You said;

    “Hard work???!!! You don’t think people are working hard enough? ”

    Everyone tells me Britain has a problem with high unemployment. Is that wrong?

  39. Gravatar of jknarr jknarr
    14. June 2013 at 08:50

    Scott, I’m just considering the marginal pass-throughs/multipliers — companies are the intervening variables to NGDP->wages.

    There is an equity payoff to issuing dividends/share buybacks (especially when cash flows are scarce), which competes with paying workers and expanding production/capex.

    I argue that a tight-money policy lowers NGDP and boosts the USD — and lowers commodity input costs and boosts import competition — and also lowers wages%revenue. Bottom line, tight money lowers labor expenses more than damages top-line demand (very likely because fiscal spending supports NGDP).

    Consider Germany — they keep demanding lower wages/more productivity for the rest of Europe, and tight money is the vector — the same has been taking place in the US.

  40. Gravatar of Edward Lambert Edward Lambert
    14. June 2013 at 10:09

    Scott,
    Then on pages 15 to 16 of your paper in my previous comment… link
    http://www.adamsmith.org/sites/default/files/resources/ASI_NGDP_WEB.pdf

    “Indeed the Fed is not really trying to raise the price level; they are trying to boost NGDP growth. For any given rate of NGDP growth, they’d actually prefer more RGDP growth and less inflation. Talking about monetary stimulus in terms of nominal income has two advantages; it is more accurate, and it also is something that the public can understand. It makes sense that the central bank would be trying to raise people’s incomes when we are in a severe recession and incomes have fallen.”

    But you said above that I was wrong when I wrote, “In order to have NGDP growth, you have to have growth in nominal wages.” But from what you write here, NGDP targeting raises people’s income. So I am right.

    But does a rise in nominal income only happen after business makes short-run profits?

  41. Gravatar of Edward Lambert Edward Lambert
    14. June 2013 at 10:43

    Scott,
    You cannot just say that a rise in real wages caused the 1921 recession. There were other factors. The discount rate starting rising in 1921. It even reached 7% in June of 1920. Also, 1920 was the peak year for demobilization of troops after WWI. Gold reserves were being lost to England. There were also many economic adjustments going on in the labor market and getting products to returning soldiers. It took 2 years to straighten it out but the recovery was fast, helped by healthy wages and expansionary monetary policy.

  42. Gravatar of Michael Michael
    14. June 2013 at 11:36

    “My fear is that NGDP growth will slow even further. If I’m wrong and NGDP keeps rising at 4% then the economy will continue to grow and the unemployment rate will fall, in my view.”

    How much of this is related to expectations? In 2007, a sharp drop in NGDP was not something anyone thought could happen – but it did.

    The NGDP growth since 2009 suggests new trends in the level and growth rate of NGDP – given time we would expect the economy to adjust.

    But we’ve also learned that the risk of a nominal shock is a lot greater than was believed five years ago, and that should a nominal shock occur, the policy is to let bygones be bygones.

    Expectations of future policy are less certain today than five years ago – is this a bigger problem than the difference between 5.5% and 4%?

  43. Gravatar of Daniel Daniel
    14. June 2013 at 11:59

    John

    The graph was from here (not my blog, just a very informative one)

    http://thefaintofheart.wordpress.com/2013/02/19/president-coolidge-in-vogue/

    Also

    http://www.measuringworth.com/datasets/usgdp/export.php?year_source=1920&year_result=1928&use%5B%5D=NOMINALGDP&use%5B%5D=GDPDEFLATION&use%5B%5D=NOMGDPCP

    and

    http://www.usstuckonstupid.com/sos_downchart.php?year=1920_1930&chart=m2&size=l

    In conclusion

    http://humour.200ok.com.au/img/bigcupofshutthefuckup.jpg

  44. Gravatar of Edward Lambert Edward Lambert
    14. June 2013 at 12:35

    W. Peden,

    how do you explain this graph?
    http://research.stlouisfed.org/fredgraph.png?g=jrL

    Do you see stagnation?

  45. Gravatar of W. Peden W. Peden
    14. June 2013 at 12:54

    Edward Lambert,

    You didn’t say anything about productivity. The topic is about whether or not real wages have stagnated. If you want to change the topic (say to “wages relative to productivity changes”) say so.

  46. Gravatar of Edward Lambert Edward Lambert
    14. June 2013 at 12:57

    W. Peden,

    How about this graph?
    http://research.stlouisfed.org/fredgraph.png?g=jrP

    Why does real compensation per hour trend with total hours? Does it mean that the more hours all people work, the more they get compensated per hour?

  47. Gravatar of W. Peden W. Peden
    14. June 2013 at 13:05

    Edward Lambert,

    I don’t draw strong conclusions from bivariate graphs.

  48. Gravatar of Edward Lambert Edward Lambert
    14. June 2013 at 13:10

    W. Peden,
    These links will help us understand real compensation per hour…
    http://www.bls.gov/opub/mlr/2011/01/art3full.pdf
    http://www.bls.gov/opub/mlr/2005/05/art1full.pdf

  49. Gravatar of John John
    14. June 2013 at 14:16

    Scott,

    I agree inflation data is bad but sometimes it’s all you have to go on. This site is the best one I could find with data from the 1920s. It comes out every month and starting in 1947 matches the CPI minus food and energy according to the St. Louis Federal Reserve economic database.

    According to the monthly data, deflation continued until March of 1923. Deflation peaked at 15.8% in June of 1921 but was still at 7.7% in April of 1922. 1922 didn’t have one month of positive inflation. Despite deflation, real GDP was positive in 1922 (around 4-5%) and 1923 was one of the strongest years ever for real GDP growth, coming in at over 10% despite low inflation.

    http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

    The point I’m trying to make is that there isn’t a set in stone connection between inflation or NGDP and employment. Labor markets can adjust more quickly than they did in 1931 or 2009. The connection between NGDP and employment is more of a loose correlation that works better in some periods than others. The early 1920s recession shows that the sticky wage story doesn’t have to be so.

  50. Gravatar of John John
    14. June 2013 at 14:23

    Daniel,

    Nunes’s post confirmed everything I said. I know you can’t find numbers or anything to back your case and that’s ok. I hope making ad hominem attacks at anonymous people on the internet gives you a warm fuzzy feeling inside.

  51. Gravatar of Daniel Daniel
    14. June 2013 at 15:09

    John,

    Seriously, are you even able to read ?

    I pointed you to some numbers – and some pictures (in case you find digits difficult to handle).

    And they tell a very clear story – the recession of 1921 was caused by monetary contraction (ya know, that “sticky wages” thing) and it ended as soon as the monetary expansion began – which continued throughout the “roaring twenties”.

    Which part of it justifies your claim of the non-existence of sticky wages at some mythical point in the past ? Because I honestly can’t think of any.

  52. Gravatar of TallDave TallDave
    14. June 2013 at 17:00

    Edward Lambert 14. June 2013 at 13:10

    I always wonder why people expect labor compensation to track productivity. If it did, why would anyone invest money in labor-saving, productivity-enhancing capital? Their labor costs would just rise commensurately and the money would be wasted.

    We should all pray the compensation-productivity gap continues to grow, it means investment is being rewarded.

  53. Gravatar of TallDave TallDave
    14. June 2013 at 17:05

    (I think the real story there is this: Revenue per employee: Yahoo!: $426,000. Microsoft: $775,900. Google: $931,600. Facebook: $1,102,000. Apple: $2,262,000)

  54. Gravatar of ssumner ssumner
    15. June 2013 at 13:53

    John, Deflation did not continue until 1923. You should use quarterly data on NGDP, that’s the best indicator of monetary policy. Or else the monthly WPI if you insist on using inflation. It rose between the 1921 low point and 1923.

  55. Gravatar of John John
    15. June 2013 at 21:42

    Scott,

    I looked at more data. Here’s an interesting site showing some other variables.

    http://eh.net/encyclopedia/article/smiley.1920s.final

    However you slice it, even using the most optimistic numbers, inflation fell extremely dramatically compared to Real GDP or employment. Yes there was a quick deep recession but however you want to slice it, NGDP was knocked dramatically lower permanently and employment recovered swiftly. This makes me question the idea that knocking the economy off of a nominal growth path is the cause of lasting unemployment.

  56. Gravatar of John John
    15. June 2013 at 21:48

    Scott,

    The wholesale price index (WPI) fell 40-50%! Deflation was worse in that year (1921) than any year during the Depression. Somehow a swift recovery followed without ANY inflation in 1922. It is possible for employment and output to recover during during “tight money.”

  57. Gravatar of Geoff Geoff
    18. June 2013 at 16:30

    Daniel:

    “And they tell a very clear story – the recession of 1921 was caused by monetary contraction (ya know, that “sticky wages” thing) and it ended as soon as the monetary expansion began – which continued throughout the “roaring twenties”.”

    Correlation is now causation?

    Egads.

    No wonder you get easily miffed. You don’t have a lot to work with, and using inadequate tools can lead to frustration.

  58. Gravatar of Geoff Geoff
    18. June 2013 at 16:32

    John:

    “I remember you saying once that you hadn’t read von Mises. It’s funny you use the same brick metaphor he uses to describe the business cycle in his book “Human Action.””

    One does not have to read an entire book to have learned off hand a good analogy for business cycles.

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