How do we identify sticky wages?

Tyler Cowen has a new post on the subject:

When you disaggregate the data at the state level, wages don’t look so sticky any more:

…states that experienced larger employment declines between 2007 and 2010 had significantly lower nominal wage growth during the same time period…Our estimates suggest that real wages also vary significantly with local measures of unemployment at the state level…there is a strong relationship between local employment growth and local wage growth at business cycle frequencies.

In other words, the supply and demand model doesn’t do so badly after all.

As I explain in this post, this is exactly what you’d expect if nominal wages were sticky.  If this were not true, there’d be something very much wrong with the sticky wage model.

The empirical evidence in favor of sticky wages is simply overwhelming. It’s just about the only thing in macroeconomics that we can be certain is true.

PS.  The supply and demand model cannot explain unemployment (in equilibrium), and hence has nothing to say about the empirical evidence described by Tyler.  In order to even attempt to apply supply and demand to the issue of unemployment, you’d have to assume wages are not in equilibrium, i.e. are “sticky”.  Or am I missing something?



18 Responses to “How do we identify sticky wages?”

  1. Gravatar of Major.Freedom Major.Freedom
    10. February 2016 at 20:24

    You’re missing any real analysis of the causes for why wage rates adjust slower in our economy than they otherwise could in an economy with liberal price and labor laws.

    In particular, you ignore the fact that inflation, which you advocate, actually exacerbates wage rigidity because it leads people to always expect rising prices. Virtually everyone living today has lived their entire lives in an inflationary environment. His has brought about an inflationary psychology in the public.

    Another main, and also underappreciated cause, is cultural Marxism, which has taken the form of many policies designed to prop up wages above what they otherwise would be.

    Wage rates in a rationalist, free market are not so sticky so as to cause long term unemployment.

    Of course monetarists, rather than fight for more liberalism, instead prostitute the existing cultural Marxism in order to propagandize for their own inflationary agenda. They have an incentive to convince people that there is something wrong with wages in a market that needs the good government doctor called Dr. Fed.

  2. Gravatar of E. Harding E. Harding
    10. February 2016 at 20:37

    Scott, I was the first to mention your post in Tyler’s comments, but Tyler instantly deleted my comment the moment he saw it. Thus, this post wasn’t really necessary.

  3. Gravatar of Trevor Trevor
    10. February 2016 at 20:41

    The paper itself actually presents lots of evidence in favor of the sticky wage hypothesis. In fact in their model they say wage stickiness was 0.66 on a scale of 1 is complete flexible and 0 is completely fixed. They also claim that the recession can be explained half by demand shocks and half by supply. The paper found plenty of wage stickiness, perhaps not as much as you think there is, but certainly this paper can’t be taken as a criticism of sticky wage macro, because it is sticky wage macro.

  4. Gravatar of Benjamin Cole Benjamin Cole
    10. February 2016 at 22:29

    Remember, those years 2007–2010 were oil boom times in some regions, and terrible recession in others. It would not surprise me if wages rose in North Dakota or parts of Texas, or that wages softened a bit in California.

    That hardly means that the sticky wage reality does not exist.

    The efficient market hypothesis does not work in 100% of cases, but it does work in, say, 98% of cases and thus is very useful in making economic policy.

    The same is true for sticky wages.

    Side note for Scott Sumner: we are the same age. When I left Berkeley to go to grad school in Texas, I encountered on-campus bars serving hard liquor to 18 year olds. Nearby Barton Springs featured girls in topless suits. Neither existed in Berkeley.

    It was an early lesson that people who regard themselves as open-minded are not always.

  5. Gravatar of A.K A.K
    10. February 2016 at 23:07

    Tyler Cowen is basically a stupid person’s idea what a smart person sounds like. Talk about confirmation bias!

  6. Gravatar of ssumner ssumner
    11. February 2016 at 06:58

    Thanks Trevor.

    Ben, Yes, the 1970s, the Golden Age of personal freedom. (Perhaps I should say for heterosexual white people.)

    AK. Are you sure that doesn’t apply to you?

  7. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 10:50

    “The empirical evidence in favor of sticky wages is simply overwhelming. It’s just about the only thing in macroeconomics that we can be certain is true.”

    Ah!!, so that’s it then? Is that what you meant by “well established theory?” 😉

    If we put the living economic Nobel prize winners in a room, would they agree? How about randomly selected editors and peer reviewers from the most prestigious macro journals? Legitimate question there: I don’t have a sense for it.

  8. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 11:00

    “The empirical evidence in favor of things falling to Earth when you drop them is simply overwhelming. It’s just about the only thing in the philosophy of nature we can be certain is true.”

    — said in 200 B.C. by some Greek philosopher of nature, while discussing the status of well established theory.

    Sorry, I’ll stop now!

  9. Gravatar of jonathan jonathan
    11. February 2016 at 11:58

    You’re missing that Tyler, whatever his good qualities (and there are many), is not a macroeconomist.

    (Sadly, there are plenty of macroeconomists who are confused about this stuff too.)

  10. Gravatar of ssumner ssumner
    11. February 2016 at 13:06

    Tom, You said:

    “The empirical evidence in favor of things falling to Earth when you drop them is simply overwhelming.”

    Oh really? How about helium balloons? How about birds?

  11. Gravatar of Ray Lopez Ray Lopez
    11. February 2016 at 19:05

    Seems the blog readership is declining, now it’s dirty old men discussing their glory days of free sex in the 70s.

    As for Sumner’s bizarre post, the only thing it can be said is that (1) Sumner refuses to cite any papers on why wages are sticky in practice, the best he’s done is to show that wages seem to cluster on the right side of distribution starting at zero, which only shows that wages are flexible when there’s inflation (as is the historical case), the exact opposite of sticky wages, and (2) Sumner imposes a metaphysical limitation of sticky wages, arguing, (i) they cannot be measured except in dis-equilibrium (ridiculous), and (ii) clear evidence that wages are not sticky (they changed the most in states having the biggest changes in employment, which is exactly what NON-sticky wages do) is evidence (in Scott’s mind) that the sticky wages theory is intact (!) because these states were apparently the least competitive since they had sticky wages (!). This last point has to be taken by faith, since Sumner is shooting from the hip. The paper does not break out its data by state, so it’s hard to refute Sumner’s metaphysical claim on this last point. It boils down to: who to believe, the prestigious authors of the paper and eminent economist Tyler Cowen, or, some retired nutter (sorry Scott)?

  12. Gravatar of Mark Mark
    11. February 2016 at 19:23

    Ray Lopez, I think Mankiw has written quite a bit on price stickiness, in fact I think he’s one of the experts in that field, you’d do well to see his papers; though the wikipedia article on “menu costs” is a good start for learning why prices and wages are sticky in practice.

    Also, how can one measure the stickiness of wages in equilibrium? The definition of wage stickiness is resistance to adjustment to a change in equilibrium. I don’t see how one can measure wage resistance to equilibrium change without the equilibrium changing (thereby putting actual wages in disequilibrium)

  13. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 19:35

    “Oh really? How about helium balloons? How about birds?”

    Lol, touché.

  14. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    11. February 2016 at 22:01

    You’re treating the labor market as homogenous. Suppose there are two distinct markets: high-skilled labor and low-skilled labor.

    NGDP falls, which means revenues of all firms fall. Firms decide that high-skilled labor, is, for whatever reason, more critical to profitability. Therefore the firms maintain their previous demand for high-skilled labor. High-skilled wages remain the same, and the high-skilled market remains in equilibrium.

    In order to cut costs, firms reduce demand for low-skilled workers, and low-skilled wages fall sharply. Some low-skilled workers, however, are not willing to work at such a low wage, and prefer to be unemployed. The price of low-skilled labor fell, so the quantity-supplied of low-skilled labor also fell. The low-skilled market is in a new equilibrium.

    This is an illustrative example. Unemployment in the THE labor market doesn’t imply that there is unemployment in ALL labor markets.

  15. Gravatar of Ray Lopez Ray Lopez
    12. February 2016 at 21:12

    @Mark, on price stickiness: I am aware of ‘menu costs’, which are trivial. An actual example from National Geographic on gold miners in the deep Amazon jungle, back in the 1970s, when even radio contact with the outside world in that remote jungle was impossible: the miners were able to get the actual spot price of gold within less than a day.

    Menu costs are trivial, outside of hyperinflation. Non-equilibrium price stickiness is not even worth talking about.

  16. Gravatar of Mark Mark
    12. February 2016 at 23:18

    Clearly, price stickiness is not a matter of whether or not but how much, and any industry that can’t change prices instantaneously (most industries of course can’t) has some stickiness. I’d say it’s indisputable that any industry subject to stringent labor laws or significant unionization has rather sticky wages and likely therefore sticky prices, depending on how much of the cost is due to labor. And there’s considerable empirical evidence of price stickiness ( that’s one interesting article on the topic).

    I find your appeal to authority (to Tyler Cowen specifically) somewhat odd since there seems a good deal of consensus behind price stickiness including a number of economists more prestigious than Cowan.

  17. Gravatar of ssumner ssumner
    13. February 2016 at 12:48

    Ray, Doesn’t the paper Tyler cites claim that wages are sticky?

    Joel, I would add that most workers being laid off are not given the choice of lower wages, they are simply fired. Companies are just as much to blame for sticky wages as workers.

  18. Gravatar of Tom Brown Tom Brown
    13. February 2016 at 15:14

    Scott, I know you advised me not to waste time posting links like this before, but you might actually like this one: you’re mentioned favorably, and it’s a pretty straight-forward take:

    “Flexible micro wages do not disprove sticky macro wages”

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