Wage rigidity in the United States (3 charts)

21 Nov

by David Ruccio [Documenti]

(form Real World Economics Review Blog, October 18, 2013)

wageIn 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:

wage

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

averageAnd 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:

cumulat3

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.

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