Wednesday, September 23, 2015

How to Unstick Wages

EPJ reader Prashanth Perumal emails:

What is the best work to understand the Austrian response to the question of sticky wages? Anything that particularly addresses Truman Bewley's Why Wages Don't Fall During A Recession? Also, is there any information available on wage flexibility in the 18-19th centuries?

My response: 

This isn't really specifically an Austrian school question. It is basic economics.

In a free market, a firm will cut wages if for some reason the revenue generated by a worker falls below the wage the firm pays out. If firms didn't do this, they would go bankrupt rapidly. That said, wage cuts are fairly uncommon. They generally occur as part of a recession, when there are changes in the buying power of money,

In other words, a down trend in wages likely means an overall decline in prices/the cost of living, so pay cuts wouldn't necessarily mean a cut in the standard of living.

There is no reason for wages to be downward sticky in a free market If an employee doesn't take a pay cut, he will go out and find another job. (Assuming, he isn't independently wealthy) . He isn't going to starve to death rather than take a lower pay. Downward sticky wages is a myth in the free market. It implies that people prefer starving to death than taking a lower wage. That's just nuts.

The only time wages are sticky downward is when you have government interference with unemployment, where wage earners need not fear loss of income when not working because of current unemployment benefits.

Bewley's book doesn't seem to recognize the complexity of how wage changes might develop in a free market, It appears he seems to confuse an overall downtrend in wages versus what an individual business owner may say.

An individual business owner may not want to cut wages so he "doesn't hurt the employee." As some of those Bewley interviewed told him. But if other firms can higher laborers cheaper and the businessman interviewed doesn't want to cut wages, he will go out of business and the laid off workers will have to find (lower?) pay elsewhere.

You can't cheat free market pricing. Only government intervention tries by paying one tax payers money out to someone else..

This is how government price intervention always works. If the government supports banana prices at $5.00 per banana, the banana prices are going to be sticky downward.

 As for wage flexibility in the 18-19th centuries. It  works the same way as in the 20-21 centuries. Markets clear unless there is a government impediment to them clearing. This is pure logic, empirical studies from any century won't prove anything different. Sticky wages is all about government support and regulations.


1 comment:

  1. ameson Berkow, Western Bureau Chief, BNN
    9:57 PM, E.T. | September 9, 2015
    Energy and Resources

    Canada's largest independent oil producer is cutting one of its largest expenses: employee salaries.

    In response to questions from BNN, Canadian Natural Resources Ltd. (CNQ.TO -2.85%) confirmed late Wednesday salaries for the company's entire Calgary and Aberdeen-based workforces will be reduced by "up to 10 percent." CNRL has more than 7,600 employees including field personnel, though a spokesperson was unable to confirm how many workers in total will see their wages cut.

    "Canadian Natural is taking additional actions to further reduce costs and to product the robustness of the company," a spokesperson said via email. "The challenges facing our industry are significant."

    Members of the senior management team, including CNRL president Steve Laut, will not be spared from the cutbacks, with the company adding the salary reduction "is higher for higher salaried individuals."