Monday, August 15, 2011

Tyler Cowen on sticky nominal wages

He puzzles over them here:

"There are good arguments that wages are sticky for (many of) the employed. Observed wage changes cluster in funny ways, indicating an unwillingness of the boss to change the nominal wage at all, and employers testify to morale problems from wage cuts (see Alan Blinder’s work). In terms of the financial crisis, Keynesian theory explains the initial lay-offs fairly well, but it — at least the sticky nominal wage version — has a tougher time explaining unemployment persistence at such a high level.

Why don’t the unemployed lower their wages to find a job? The more tragic you think unemployment is, the greater the puzzle here, and yet the people who stress the tragedy are often least likely to admit the positive puzzle (and vice versa)."

He proceeds to give lots of very good reasons why nominal wages for the unemployed are sticky. But I think it's all a whole lot easier to understand if you realize that:

1. Labor isn't bought on a spot market. Labor is more like an investment good than a consumer good, and

2. Unemployment and labor surplus are not the same thing. You can have lots of unemployment in a clearing labor market.

I'm sure wages are a little sticky for all classes of workers, but that's not the major problem we're facing.


  1. The U.S. government has pursued a couple of failed industrial policies*; the results of that have come home to roost.

    *Failed social investment in other words.

  2. Is that comment meant for this post Gary? I'm not sure I understand how that's relevant or exactly what you're talking about.

  3. How does labor surplus differ from the natural rate of unemployment? Even if labor is an investment good (asserted, not argued), why can't is also be bought on a spot market?

  4. Not to mention the substantial amount of government intervention to prevent wage reductions (minimum wage laws, for example).


All anonymous comments will be deleted. Consistent pseudonyms are fine.