Are wages sticky after all?

By Felix Salmon
September 16, 2009
David Leonhardt for the shout-out in his column today. Referencing an old blog entry of mine, he returns to the question of sticky wages and concludes that, contra the likes of Chris Swann, there really is something to it: "the sticky-wage theory," he says, "seems to have survived the Great Recession", with average weekly pay rising from $612 to $618 in nominal terms over the past few months, and even more in real terms.


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Many thanks to David Leonhardt for the shout-out in his column today. Referencing an old blog entry of mine, he returns to the question of sticky wages and concludes that, contra the likes of Chris Swann, there really is something to it: “the sticky-wage theory,” he says, “seems to have survived the Great Recession”, with average weekly pay rising from $612 to $618 in nominal terms over the past few months, and even more in real terms.

I’d caution, however, that it’s a bit too early to be quite as constructive as Leonhardt is when it comes to wages. No one ever said that the stickiness in wages had disappeared overnight: these things happen slowly. Here’s Swann in June:

With so many workers waiting in the wings, wages nationwide may start to fall over the next couple of years.

The United States would be following the path of Japan in the 1990s — the most recent example of absolute pay cuts in a modern economy.

And here he is following up last month:

With the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn’t start to fall until 1997. The United States could still follow Japan’s lead.

When one looks at the large number of companies which have implemented pay cuts, it’s too much of a stretch to extrapolate that to immediate nationwide pay declines. Instead, it’s more that a taboo is being broken. What’s more, there’s a continuing and significant risk of medium-term deflation, certainly so long as unemployment remains at its current elevated level.

Here’s Leonhardt:

“There’s been a huge shift in power in recent years from labor to capital,” as the astute financial blogger Felix Salmon has written. Labor unions have shrunk, and companies can move operations to lower-wage countries. “Now that workers have lost their negotiating leverage,” Mr. Salmon wrote after FedEx made its announcement, “we might start seeing more across-the-board pay cuts.” If the economy were to weaken again, we still might.

But I don’t think that the only way we get there from here is via a double-dip recession. Any jobless recovery runs the risk of painful deflation. So unless and until the unemployment rate stops going up and starts coming down, the threat to wages remains.

Update: Leonhardt responds.

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11 comments so far

Does that average include persons whose weekly pay went to $0? If not, all it really says is that the people who were not let go have a (very slightly) higher average wage than the workforce pre-recession.

Posted by Ken | Report as abusive

I’ve noticed that the only unemployed folk in my region who landed a job lately are those who will work for minimum or slightly above wages with no benefits.

Sure looks like we’re being groomed for our new owners,,,the Chinese! It’s not so bad for the beneficiaries of taxpayer bailout money. Worst possibility for those fat cats is a bruised ego, not living under a bridge and eating from garbage cans.

Posted by RH Pyle | Report as abusive

And what a pleasure it is that Leonhardt can actually link out from his columns to other sites and primary material, despite the fact that his column resides outside the blog ghetto of NYT.com.

Not wages, but the effective demand determines Production and employment in an economy, wrote Keynes. And he is Right.

FWIW, my employer is giving no 2009 raises to employees who make over $60k. And, any raises at all (and the evaluation process) have been pushed back until early 2010, rather than the prior schedule which had them taking place in the summer with pay increases kicking in in September.

It seems unlikely that they’ll give raises twice in 2010, so it’s entirely possible my salary may be stuck at 9/08 levels until 2011.

And of course my income is lower, in non-inflation-adjusted terms, than it was in 2001.

Posted by Jon H | Report as abusive

In addition to @RH Pyle\’s point, it might also be worth examining the relationship of wages to productivity. Quite obviously, the first workers to be laid off are the comparatively less productive ones, which will probably have some correlation to their wages. It may be possible that as the less productive workers who are also paid somewhat less are fired, the relatively productive workers remaining in the workforce bring the mean wage per time up, even if the mean wage per production drops. It\’s even feasible that the workers still employed have received a nominal wage cut as a group within the larger group of people employed before the economy went to crap.

Posted by Alexis Nicasio | Report as abusive

Responding to Alexis Nicasio:

In my case, I was retained while employees with greater senority were laid off. Ultimately though I had to be sacrificed before someone with greater senority turned a lawyer loose on the company. (Know how good that made me feel?)

To this day, I feel that the company I worked for acted ethically and compassionately. The remaining employees have been required more of but their compensation has not been molested. All because of good corporate stewardship and decency.

Thanks for the addition though. I used to think that only the dead wood was cleared. I think differently now.

Posted by RH Pyle | Report as abusive

@RH Pyle

Good point; it only makes me MORE interested to examine the relationship between mean wages and productivity. It could be that wide-scale layoffs function to increase correlation between wages and productivity. Of course, I keep saying ‘could be’ or ‘might’ and really have nothing to show for it, but these questions make me feel like just looking at wages, nominal or real, leaves us with still not as good of data as we’d like.

Posted by Alexis Nicasio | Report as abusive

What I haven’t seen talked about in any major press is the risk of sudden inflation stemming from the fact that government bond auctions around the world are largely controlled by what may be termed non-economic players. That would be sovereign governments through their central banks, automatic retirement funds, insurance funds, and our own social security system trust fund among others. These non-economic pools just show up to buy whatever dollar amount of bonds they are supposed to buy, regardless of price. An overwhelming majority of bond purchases happen on literal autopilot, in systems built on the assumption that the bond market is basically efficient (which it plainly is not when the biggest buyers have become these non-economic players).

Unlike in the past, when bond vigilantes could set prices by going on strike when they saw interest rates they did not like, today’s players are not acting like bond vigilantes at all.

The present circumstance appears to be a lull where many, including central bankers, are deceived by successful and even oversubscribed debt auctions. But in reality this is only saying that the demand for bonds presently exceeds supply, not that the price of these bonds is appealing. As noted, price is not being considered by most buyers. Supply and demand for bonds can shift rapidly, with the biggest source of the shift likely being private and public retirement funds in much of the aging developed world, which are going from being bond buyers to bond sellers.

Whereas in the past, undersubscription could be cured by a simple uptick in the interest rate offered, the next time that a sovereign debt auction comes up significantly undersubscribed, we are likely to find that new buyers are not suddenly drawn in. The majority of buyers will have been non-economic buyers who are tapped out. They were not waiting on the sidelines, bond vigilante-style, for an uptick in interest rates, for they were on autopilot and will have purchased their quota already.

Belief in efficient markets seems to still run strong at central banks. In fact, even if actively managed bond funds have some skill, they cannot set prices if the market is dominated by non-economic players.

The result will likely be a sharp inflationary flare-up that takes many by surprise, including our very own Ben Bernanke.

Posted by Daniel Hess | Report as abusive

@ Alexis:

I’d be interested in the same information. Any idea how to aquire good data to construct that correlation?

Posted by RH Pyle | Report as abusive
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