Tuesday, November 26, 2019

Sticky Wages (Part 2)

Austro-Punk has replied to my initial post, Are Wages Sticky Downward?  My responses to him are in blue.

Wenzel you fail to look at Rothbard's quote RIGHT AFTER what you chose to post. Here (Pg 43-44):

"Occasionally, however, the wage rates are maintained by VOLUNTARY CHOICE (although the choice is usually ignorant of the consequences) or by coercion supplemented by voluntary choice. It may happen, for example, that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty. Such persuasion has actually been at the root of much of the unemployment of our time, and this was particularly true in the 1929 depression." (My bold)

So Rothbard is saying this in GENERAL TERMS that wages can be sticky downward...

I am not sure what the point is here you are trying to make. I am not hiding the fact that Rothbard holds the view that wages can be sticky downward. In fact, most of my original post is a refutation of that point as it is being made by Rothbard.

You say: "To think that free markets don't clear, even labor markets, is a very odd view to hold. It is, in fact, a Keynesian notion."

This is a bit odd. First, you're not distinguishing between the short-run and the long-run. In the long-run, your statement is largely accurate. In the short-run, wages and prices don't adjust quickly, efficiently, or proportionately, and there are reasons for this that have nothing to do with government intervention (employee morale, the money illusion, etc).

Who the hell is talking about wages adjusting quickly?

In fact, I write:

There may be some stubbornness about taking a lower wage for a few weeks or even a couple of months...
In the short-term it is all about trying to determine opportunities and prices in the market. It is sometimes referred to as "frictional unemployment." 

"Sticky wages" is an entirely different concept that means even when it is clear what opportunities exist, and what wage levels are, workers refuse to work for such prices. 

Also "sticky wages" did not originate with Keynes, and therefore isn't "Keynesian". Henry Thornton talked about it in 1802 in his "Inquiry into the Nature and Effects of the Paper Credit of Great Britain" as well as Ralph Hawtrey over 2 decades before Keynes wrote the General Theory.

Who said the concept of "sticky wages" originated with Keynes? The point is that "sticky wages" are fundamental to Keynesian economics and every Keynesian economist will agree with this point.

The number one best selling economic texts are written by the Harvard professor Greg Mankiw. In The Concise Encyclopedia of Economics, he writes:
New Keynesian economics is the school of thought in modern macroeconomics that evolved from the ideas of John Maynard Keynes...
The primary disagreement between new classical and new Keynesian economists is over how quickly wages and prices adjust. New classical economists build their macroeconomic theories on the assumption that wages and prices are flexible. They believe that prices “clear” markets—balance supply and demand—by adjusting quickly. New Keynesian economists, however, believe that market-clearing models cannot explain short-run economic fluctuations, and so they advocate models with “sticky” wages and prices. New Keynesian theories rely on this stickiness of wages and prices to explain why involuntary unemployment exists and why monetary policy has such a strong influence on economic activity.



  1. You're a slippery one. You say:

    "Who the hell is talking about wages adjusting quickly?"

    You are, and I'll show why. But first let's look at what sticky wages are. From Wikipedia:

    "If one looks at the whole economy, some prices might be very flexible and others rigid. This will lead to the aggregate price level (which we can think of as an average of the individual prices) becoming "SLUGGISH" or "sticky" in the sense that it does not respond to macroeconomic shocks as much as it would if all prices were flexible. (MY BOLD)

    Notice the word sluggish. That means we're talking about time here. Wages don't adjust if not enough time is allotted. Now, let's go to your original post I commented on, "Some Terrible Economics Out of the American Economic Review." You say:

    "It points to the very strong possibility that what Kaur is really detecting when he detects sticky wages is government interference rather than some MAGICAL DEFIANCE of supply and demand economics because of beliefs. (MY BOLD)

    Notice your words here "magical defiance of supply and demand". You're saying here that nothing in the market can "defy" supply and demand, yet when we consider the definition of sticky wages above, supply and demand DON'T ADJUST quickly which is why BY DEFINITION they're sluggish. That's the point. You implied this in your original post.

    Yet you seem to deny this in your original post with the phrase "magical defiance" above.

    Also, you say:

    "The point is that "sticky wages" is fundamental to Keynesian economics and every Keynesian economist will agree to this point."

    Replace the word Keynesian twice in your sentence with "monetarist." While all Keyenesians believe it, so do monetarists. In fact, New Classicals are the only ones who think otherwise.

    1. Well then, that would just make monetarists another group of Keynesians, which many Austrians have have argued is the case.

    2. Well those Austrians would be wrong.

  2. As one of my friends likes to say when a conversation turns to personal merits of politicians: "I'm not cognizant of kinds of shit". Same goes for economists who justify pushing people this or that way with their "policies".