Real Wages and Output Fluctuations

Tyler Cowen writes,

Here’s the catch: on the internet I’ve read dozens — no, hundreds of times — that real wages haven’t gone up more because the Fed chokes off real wage hikes every time the economy nears recovery. You will notice that this claim is simply flat out wrong if the mainstream view of real wage acyclicality is correct.

The issue of real wages and output fluctuations is an excellent illustration of the way that Keynesian macroeconomics operates.

1. At the crude level, Keynesians speak as if real wages go up as output goes up. This is classic, “spending creates jobs, jobs create spending” thinking, which is not good economics. However, you can catch Ph.D economists talking this way.

2. At the abstract level of models, a very standard macroeconomic theory is that output fluctuations are movements along a labor demand curve. That means that as real wages go up, output goes down. This is a core element in Scott Sumner’s macroeconomic analysis, for example.

3. Empirically, it is very hard to spot any strong correlation, positive or negative, between real wages and output.

So macroeconomists will let the public think (1), will build a model that says (2), and when pressed will admit (3). And nobody calls them out on it.

2 thoughts on “Real Wages and Output Fluctuations

  1. It pays not to confuse total wages or wage income with wage rates. Inherently the latter will be assumed as it is the one that matters most to people.

  2. Sumner does not claim that real wage rates are pro-cyclical. Instead he claims that the average wage rate divided by nominal GDP, correlates to the unemployment rate in the short run.

    ie MV = Py = wN + rK

    Where w is the average wage rate and N is the total number of hours worked, K is the “capital stock” and r is “the rental rate of Capital”

    MV = wN + rK

    MV^-1 = (wN + rK)^-1

    w/MV = w/(wN + rK)

    if the unemployment rate U is the difference between N and some potential N* then his claim amounts to saying that N* – N ∝ w/(wN + rK) in the short run and not that N* – N ∝ w/P in the short run.

Comments are closed.