Are wages sticky after all?
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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.
“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.