No, this is not another post on the Zimmerman case. It is my reaction to an article by Mary C. Dalythese patterns are consistent with the reluctance of employers to adjust wages immediately in reaction to changing economic conditions. In particular, employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions. This behavior, known as downward nominal wage rigidity, played a role in past recessions, but was especially apparent during the Great Recession. Wage rigidity kept nominal wage growth positive throughout the recession. This led to a significant buildup of pent-up wage cuts, that is, wage cuts that employers wanted, but were unable to make. As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels.
Pointer from Mark Thoma.
If no one told you what the data looked like, which would be more plausible?
a) Employers at first are reluctant to let go of employees, and they instead react to a drop in demand by immediately slowing wage growth. If the recession persists, they fire people.
b) Employers at first are reluctant to slow wage growth, so they fire people. If the recession persists, they slow wage growth.
I’m sorry, but (a) seems way more plausible to me than (b). We live in a world where there are a lot of fixed costs of hiring and firing. Yet the authors want to argue that in the short run, the easiest margin of adjustment is to fire people, and then in the long run you hire them back at lower wages.
Now this is a bit better:
As the recovery takes hold, businesses gradually reduce wage growth. At the same time, inflation typically erodes the real wages of workers, relieving some of the pent-up demand of employers for wage cuts. This gradual process can continue long after the unemployment gap begins to narrow. At the same time, slower wage growth also means businesses are able to hire more workers, which stimulates the demand for labor and pushes the unemployment rate down further.
Emphasis added. Still, I hate the phrase “pent-up demand for wage cuts.” It makes it sound as if “gee, if we could just get workers to accept a little lower wage, I could keep all of them.” That is a world in which there are an awful lot of $20 bills lying on the sidewalk.
Instead, I prefer to think of a dynamic economy and ask “what keeps entrepreneurs from finding ways to make use of available resources (unemployed workers)?” To me, that makes a recession more comprehensible, although less treatable.
To add some data for anyone interested:
Private Layoffs and Discharges: http://research.stlouisfed.org/fred2/graph/?id=JTS1000LDL,#
Private Hires: http://research.stlouisfed.org/fred2/graph/?id=JTS1000HIL,#
These charts support Kling’s comments.
Indeed, the drop-off in new hires is larger than the increase in layoffs.
I perceive that looking back on the “Great Moderation”, there is a perception [sic.] that this was a time when nobody was ever fired, no firm ever failed, a time when we turned on all the machines and stepped back. (An uncharitable view of Keynesianism would suggest that they favour fixing everything by turning all the machines back on).
The JOLTS data suggest a more Schumpeterian, PSST (if I understand correctly) view: “moderations” are not all that moderate or boring for individual firms. A boom differentiates itself from a recession by the existence of a thriving firm for every failing firm.
First, I’m a big fan of your blog. Second, I pick b) as the more plausible. I am employed in the auto dealership industry. I’m a CPA (BA in Econ from UCSD) and have 25 years experience in the general and financial management of this small business segment. Reflecting on past downturns in the economy it has always been pervasive in our business that we haven’t the time for slowing wage growth. Something must be done and done now. Also, and more importantly than the time aspect, wage reductions have a lingering effect on employee productivity that layoffs do not have. Those that survive layoffs have a bright outlook knowing that they survived with their standard of living intact. Victims of wage reductions don’t quite ever forget the slight especially if the cuts only hurt the rank and file; leaving management unscathed or still well paid compared to the rest. This “slight” hurts productivity and in retail that means reduced sales.
Good point. Better a few motivated employees than a lot of disgruntled ones.
I think most of these happen, just at slightly different times. Employers first stop hiring. As hiring becomes difficult, employees stop leaving. Employers slow wage growth but that takes too long and is too slow during a recession so they quickly shift to layoffs, even anticipatory ones in an attempt to complete them in one pass. Once the bottom has been reached they start increasing wage growth along with productivity to keep their employees in place, happy and hardworking, and avoid hiring until they are past the point of no choice. Once hiring begins, the virtuous cycle re establishes increasing demand.