Margins of Adjustment

Tyler Cowen quotes from the abstract of a paper by André Kurmann, Erika McEntarfer, and James Spletzer

In our data, only 13 percent of workers who remain with the same firm (job stayers) experience zero change in their nominal hourly wage within a year, and over 20 percent of job stayers experience a reduction in their nominal hourly wage. The lower incidence of downward wage rigidity in the administrative data is likely a function of our broader earnings concept, which includes all monetary compensation paid to the worker (e.g. overtime pay, bonuses), whereas the previous literature has almost exclusively focused on the base rate of pay. When we examine firm labor cost adjustments on both the hours and wage margins, we find that firms have substantially more flexibility in adjusting hours downward than wages. As a result, the distribution of changes in nominal earnings is less asymmetric than the wage change distribution, with only about 6 percent of job stayers experiencing no change in nominal annual earnings, and over 25 percent of workers experiencing a reduction in nominal annual earnings.

A few comments.

1. At the link, it says, “Preliminary and incomplete. Do not cite without permission of authors.”

2. This finding, if established, would only damage macro theory to the extent that bonuses and other fringe benefits are the alternative margins of adjustment. If the alternative margin of adjustment is hours, then that would actually serve to reinforce the macro theory that says that real output falls when nominal GDP growth is slower than expected because nominal wages are sticky.

3. I should note that there also are alternative margins of adjustment that can reduce price stickiness relative to list prices. For example, a restaurant could keep its prices constant but reduce portion sizes or quality. A clothing store could keep its list prices constant but change the size and frequency of discounts.

3 thoughts on “Margins of Adjustment

  1. “This finding, if established, would only damage macro theory to the extent that bonuses and other fringe benefits are the alternative margins of adjustment. If the alternative margin of adjustment is hours, then that would actually serve to reinforce the macro theory that says that real output falls when nominal GDP growth is slower than expected because nominal wages are sticky.”

    It may be interpreted this way, but it isn’t automatically true. Work hours are not homogenous, this would only be true if the hours cut were of average productivity (or more). Ask a retail employee if working an eight hour shift the week before Christmas is identical to working an eight hour shift in June. When hours get cut it isn’t the intense, high volume, high stress, high effort hours, it is the slow, spend your day picking up a little and talking with coworkers as a handful of shoppers filter in and out of the store. These are essentially fringe benefits, rather than pay extra during the busy seasons and then cut hours way back (there is some cut back, but not the maximum or “optimal” amount) in the slow seasons, stores will smooth earnings out and provide low effort hours as part of the compensation.

  2. I should note that there also are alternative margins of adjustment that can reduce price stickiness relative to list prices. For example, a restaurant could keep its prices constant but reduce portion sizes or quality.

    Exactly. What I noticed from about, oh, 2007 or so, was that many of the mass produced, non-perishable products I was used to buying at a certain quantity and range of prices gradually shifted to higher price per ounce though a combination of lowering the actual quantity provided and maintaining the same container sizes with a little more empty space left in.

    For example, the standard beef jerky bag size used to be 4 ounces for around 5 dollars. This went down to 3.75, then 3.5, and now typically 3.25 ounces, with bags nearly as big, and prices perhaps even a little higher. I could provide lots of other similar examples. The phenomenon of psychologically anchoring on nominal price and size with less sensitivity to quantity on goods packaged in variable-quantity containers is fascinating and, apparently, significant.

    Relatedly, I once attended a lecture of a food scientist from Procter and Gamble (or what it Conagra?) who said that ‘multigrain’ was the greatest business development of the past generation. There is a primary reason and an incidental benefit.

    The primary reason is that it turns out that the food scientists have discovered countless ways to create the same kind of experiences for products using cooked and processed, milled-grains, with each ‘experience’ of texture and flavor being achievable by resort to any of a whole library of recipes using different concentrations of rice, potato, corn, and wheat flours. So maybe there are a dozen different and distinct ways to make a chip taste exactly the way a multigrain sun-chip (or whatever) should taste.

    This allows the companies producing such products to use this recipe-based ‘margin of adjustment’ to hedge the volatile commodity futures markets and ensure as consistent a price point over time as possible, while other end-consumer products tend to have much higher volatility of input costs. The consumer is oblivious to the changes in formula that accomplish this temporal price consistency, and doesn’t experience any drop in quality.

    The incidental benefit is that people tend to mistake ‘multigrain’ for ‘whole grain’, and tend to attribute extra ‘healthfulness’ to products that make prominent use of the term. Obviously, the companies that produce these products are in no hurry to disabuse anyone of a notion which is very convenient for them.

  3. The study includes overtime pay. But the average workweek and overtime hours are highly cyclical as firms expand overtime leading into a downturn and cut hours sharply in recessions. This has to account for a large share of the change in average wage the study found. Moreover,they found that most people did not receive a wage change during the year. But standard practice in US business is to conduct salary reviews once a year and most wage increases occur a year after the previous change. I suggest they look at the change in the average pay over a fifteen month period.

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