Home > upward income redistribution > Wage rigidity and the economic wars in the United States (3 charts)

Wage rigidity and the economic wars in the United States (3 charts)

from David Ruccio

In the mainstream macro wars, the debate is focused on wage stickiness of a specific sort: the fact that nominal wages, even in the face of significant unemployment, seem not to decline. It’s called the “downward nominal rigidity of wages,” which calls into question the neoclassical rejection of Keynesian theory and the need for a microfoundations of macroeconomics.*

That, of course, is only one economic war. The other war, which mainstream economists have mostly ignored, has to do with a different kind of wage stickiness: the rigidity of real wages. As it turns out, real wages have been stagnant—and, to explain its causes and consequences, we do need a microfoundations, albeit one quite different from the kind we currently find in mainstream economics.

Real wages have been stagnant since the end of the Great Recession:

Earnings-average-hourly-real

They’ve been stagnant, for most workers, since the beginning of the century:

real wage-EPI

And they’ve been stagnant (even in terms of hourly compensation, which has grown fast than wages), especially in comparison to the growth in productivity, since the mid-1970s:

ib330-figureA

The issue of the “upward real rigidity of wages” raises a whole set of different questions: about firms’ reluctance to increase real wages, workers’ inability to demand higher real wages, and thus workers’ declining share of the wealth they produce.

This particular wage stickiness is a problem that is central to both microeconomics and macroeconomics. At the microeconomic level, workers have been losing out since the mid-1970s, which in turn created the conditions for the macroeconomic crash of 2007-08; and the macroeconomic solutions that have been adopted to get us out of that mess have, at the microeconomic level, benefited a tiny minority at the top precisely because real wages for the rest have been kept down.

Sure, wages have been sticky. But, for the purposes of both economic theory and policy, we should be much less concerned with the downward rigidity of nominal wages (which, after all, if fixed would make matters even worse) and more with the upward rigidity of real wages.

*Specifically, the fact that nominal wages (and, with them, the overall price level) are not declining—in other words, that firms seem to be reluctant to cut nominal wages or workers to accept lower nominal wages, even with high and long-lasting unemployment—is not inconsistent with a large gap between real and potential output, as is the case within a macroeconomic framework based on neoclassical, efficient-market assumptions.

  1. October 18, 2013 at 8:47 am

    Is the stagnancy in wages towards lower end of the spectrum a result of socialism or labor unions’ death?

  2. Bruce E. Woych
    October 18, 2013 at 1:42 pm

    Text Quoted:
    “At the microeconomic level, workers have been losing out since the mid-1970s, which in turn created the conditions for the macroeconomic crash of 2007-08; and the macroeconomic solutions that have been adopted to get us out of that mess have, at the microeconomic level, benefited a tiny minority…”
    ======================================
    How can you substantiate the direction of causality in this statement. The unsacred truth may well be more that rigidity at the microlevel has been orchestrated from the macrolevel specifically to tap that monetary resource by predators that care nothing about the domestic economy. Subsequently, the “solutions” adopted are not intended to “get us out of this mess” but to solidify the financial institutions as the primary source of all liquidity and…resulting in (as you say) only a very small minority benefiting from those “solutions.”

    If all income is homogenized, these charts make sense. In the “real world” class and professional distinctions may have stayed relatively stable but unemployment and part time work has increased dramatically with “insecurity” accelerated a incendiary levels.

    • Bruce E. Woych
      October 18, 2013 at 2:09 pm

      In the mainstream macro wars, the debate (thanks for this link David)
      http://krugman.blogs.nytimes.com/2013/10/12/sticky-wages-and-the-macro-wars/?_r=0

      Some of the comments are better than the article which frames the questions and therefore ‘taylors’ conclusions to fit. (the neo-scientific-taylorism…in operational mode …fresh and salt water institutional presumptions all included as universal reality).

  3. BFWR
    October 18, 2013 at 1:45 pm

    Free market economic theory is basically an erudite fantasy. An economic system left to itself can take any number of directional turns, and is radically unstable because it is by empirical cost accounting data and convention…price inflationary. Therefore one needs to create freedom. This can be accomplished by actively equating total individual incomes and total prices with a universal dividend to individuals, and mathematically equating the costs of total production and total consumption periodically/monthly with a general discount on prices the total of which is also rebated back to merchants participating in such discount. Then you will have the potential for a free and free flowing market within which profit, free enterprise, private property and competition actually can also freely exist.

  4. Olivia Mak
    October 18, 2013 at 2:22 pm

    Thanks for sharing the insightful on real wages. Being informed about labor law issues is so important to an individual’s professional growth. I became knowledgeable of the overtime labor laws in Connecticut when I first started out my career, and because of that I am more confident of my skills and professional growth.

  5. October 18, 2013 at 6:43 pm

    It is unproductive to let academics like Krugman or Lucas define the conversation in highly restrictive and ultimately irrelevant terms. Krugman talks about liquidity-traps in macroeconomic terms and attacks Lucas’ rational expectation of individuals. It is a conversation may have been relevant 40 years ago, but sheds no light on what’s happening now.

    Firstly, individuals do not have complete freedom in choosing lower wages, as there are minimum wage laws (in nominal terms). So it is not a question of individual rationality in “money illusion” or “downward nominal rigidity of wages”.

    Secondly, trade unions do not have ability to raise nominal wages, because globalization would see jobs exported to low cost countries (e.g. motor industry). So again it is not a question of individual rationality in “money illusion” or “upward real rigidity of wages”. Capitalism is about the profit maximization of firms, which compete on a global context.

    In a globalized world with free capital flow, there is a tendency for real wage equilibration across all countries in a particular industry. In those cases, it is a question of the relative strengths of the currencies. The US dollar tends to be over-valued (for many industries) because of its reserve currency status.

    Surely, today’s reality makes both the neoclassical and the Keynesian paradigm irrelevant. It is unproductive to use old and irrelevant paradigms to understand new economics.

  6. Min
    October 22, 2013 at 6:36 am

    I have a question about wage rigidity. From time to time I have seen graphs of year to year changes in wages. The graphs look normally distributed, except for a high spike at zero. That is not the kind of graph that I would intuitively expect. OC, the spike at zero indicates rigidity of some wages, anyway. But why would wage rigidity not produce a generally skewed graph? Even if we had a spike at zero, shouldn’t it look like a wall, with wages “wanting” to change, but prevented from doing so by wage rigidity?

    Specifically, the non-zero wage change distribution has a positive mean. If we assume that the wage changes in the spike at zero would have a negative mean, except for wage rigidity, then shouldn’t we say that some wages are rigid, while others are not? That we cannot speak of wages in general being rigid?

    Thanks. :)

    • October 22, 2013 at 4:50 pm

      Exactly. Macroeconomics is all nonsense, because ignoring some variables such as capital flows and aggregating other variables e.g. wages, serve to hide important economic problems.

      Monetary policies by central bankers, particularly the US Fed, are conducted based largely on macroeconomics. There is little concern about the detailed impact of their actions: where did all the monetary creation do to the economy? Wage regidity in aggregate is nonsense. Monetary stimulus went to the financial sector and not to the rest of the economy. Central banks are integral parts of a global scam of wealth transfer.

      The wages, both nominal and real, in the fianncial services sector are highly flexible and usually upwards. In the cesspool of corruption, New York City, the average salary of the financial sector was 5.2 times that outside in 2012, increasing from double 25 years ago according to the latest report:

      Click to access rpt7-2014.pdf

  7. October 31, 2013 at 7:39 am

    Economic Warfare actually provides some strong and serious solutions for overcoming the forces against wealth creation, and lays out a strategy for not only surviving in today’s turbulent financial environment, but regaining the economic freedom that marked American exceptionalism. For nearly one hundred years, we have allowed our public servants to operate based upon the theory that bigger government is better government, no matter the cost. That theory has nearly destroyed us.

    • merijnknibbe
      October 31, 2013 at 8:05 am

      Please, define government. Washington? Educators? Welfare? The increase of the welfare system has been highly (but surely not totally) effective in rooting out abject poverty! That is better, surely nowadays as people are old and feeble for longer. Strongly market based systems do not seem able to do this on their own.

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