Academic Literature

Krugman – Macro 101 – Sticky Wages

A bit more methodology discussion. I’ve written quite a lot about sticky wages, aka downward nominal wage rigidity, which is one of those things that we can’t derive from first principles but is a glaringly obvious feature of the real world. But I keep running into comments along the lines of “Well, if you think sticky wages are the problem, why aren’t you calling for wage cuts?”

This is a category error. It confuses the question “What do we need to make sense of what we see?” with the question “What is the problem?” So let me talk about that.

When Keynes argued against the “classical economists”, he was to a large degree arguing against the view that there is no such thing as involuntary unemployment — a view often defended, then and now, by an appeal to the usual logic of supply and demand. If we’re looking at the market for, say, wheat, and there’s an excess supply — sellers want to sell more than buyers want to buy — we expect to see the price fall rapidly to clear the market. So if there were really a large excess supply of labor, shouldn’t we be seeing wages plummeting?

And the answer is no — wages (and many prices) don’t behave like that. It’s an interesting question why, one that has to be answered in terms of psychology and sociology, but it’s simply a fact that actual cuts in nominal wages happen only rarely and under great pressure. So wage stickiness is an essential part of a demand-side story about what’s going on with the economy; it’s how you answer the question of why wages aren’t falling.

But that’s not at all the same thing as saying that excessive wages are the problem…

via Sticky Wages and the Macro Story –



  1. Pingback: Keynes argued that slumps can happen because of declining wage | Job Market Monitor - May 27, 2014

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