"Wage Stickiness" Epiphany

One of the very few things conventional economics got wrong about the mini-depression that started in 2008 was that nominal wages did not go down as much as the unemployment increase would have suggested.

There is a "stickiness" to wages that inhibits nominal wage cuts. Instead, wages are just frozen, which over time becomes a wage cut through inflation.

That stickiness was, during the worst of the down-turn, stickier than was predicted.

So we know that businesses are, in aggregate, on average, less inclined to cut nominal wages than they could "get away with."

Why?

Epiphany (for me, not for the world)... I'm guessing that the lower the value-fairness of the wages to begin with, the higher the stickiness when unemployment goes up.

(Coarser version: You has less room to screw people who are already getting screwed.)


Everyone is paid something for showing up -- for not quitting. It typically costs money and value when someone quits. The cost of people quitting is part of the big value picture that determines wages. So though most of your wage is for the specific work you do, part of your hourly wage is for the value you provide by saving the cost of replacing you.

But business has been pocketing some of that value... acting as if replacing employees is not as costly as it really is, and getting away with it (on average) due to a bias in the overall system.

But when push comes to shove, they (on average, always on average) really don't want everyone to quit, even when the streets are full of unemployed applicants.

"Unemployment is 10%. I could probably tell Jim I am cutting him from $11/hr to $10.50/hr and get away with it, but he'd be pissed and insulted and unmotivated and there's a chance he would quit, which I cannot afford. He's good, it costs a ton to hire somebody, I might have to pay overtime to other employees to cover his shift... what if I can't find somebody good? Then what? (avoiding Uncertainity has a value) Having him here is like me being paid $3 for every hour he works. Taken altogether it isn't worth trying to get the $0.50/hr."

Don't rock the boat because Jim is really a bargain.

In an economy where wages are systematically suppressed $10 of wages is buying an unusually high level of value. If your $11 employees are worth $14 then it is less wise to gamble on an unknown employee. The bird in hand is good.

In the other hand, in a system where wages are inflated I doubt wages would be very sticky at all. If you're paying $14 for $11 employees then you'll be keener on investigating what you can get for $11 in an environment with a surplus of applicants.


So that's my take on the psychology of the thing, though it might not survive in equation form. (I am not an economist and have no idea precisely how flawed this might be.)

Wage stickiness today probably arises from the suppression wages that has been building upon itself since the early 1980s.


This is easily testable, I suppose. Compare wage stickiness in various national systems.

But I am convinced that wages paid today deliver more value per dollar than they did in 1980... that people here have been, on average, are paid less than they "should" be, economically.