We have a question:
We have known since Keynes that nominal wages are sticky downwards. Are wages also upward sticky? Seems like maybe yes? @lkatz42 @jasonfurman @Austan_Goolsbee @ProfNoto @delong @alexoimas @ATabarrok @DLeonhardt https://t.co/lwTO9jkBca
— Richard H Thaler (@R_Thaler) November 19, 2021
Speaking from the point of view of a practitioner, not a theoretician, I'd hardly be surprised if wages were sticky upward. I can think of at least two reasons for this.
First, there's just plain inertia. Hiring managers use compensation surveys or other forms of past compensation data to figure out what they need to pay, and those are always a year or two behind.
Second, if you start paying new hires more, word gets around pretty quickly and your existing employees start demanding raises. That's expensive.
So there's fear of paying new hires more than experienced workers. There's plain old greed, since obviously employers would prefer to pay their workers as little as possible. And there's lack of knowledge about inflation. Put it all together, and wages are probably slow to respond to both labor shortages and higher inflation, especially when they manifest themselves as sudden spikes.
Hiring temps / contractors is the tried and true method for keeping wages down. My current employer is stuck in this balancing act. And the full timers are starting to get annoyed.
Strong unions can help make them "sticky up".
Of course you have the nurses. It seems that hospitals are offering trite bonuses to keep their nurses on board, yet pay visiting nurses relatively huge sums to come in to help during covid crises. Part of the problem has been that hospitals were understaffed to start with.
A lot of work will need to be done to fix our medical care system.....The covid crises will end, and more nurses will probably leave the profession.
Yes, good point re unions but only in one way. To the extent a union manages to push wages higher than what the free market demand and supply would produce, then , when conditions change that increase the free market wage , the union wage will not increase as much if it is still above the new free market level . Until at least the union contract expires and new negotiations.
In that case , union wages are sticky upward as not rising when free market wage goes up. But not in a way which leaves the union wage above free market level. So you will not end up with a " shortage " of labor for union work as workers will still flow to the union job if they need more workers, as still above what they can get re free market jobs.
End result can be the shortage produced by this in labor gets concentrated in non union employers, as their workers flow to union jobs as that workforce expands ( which employers do as their wage is not as far above free market) . Until non union wage might eventually be pushed up to union level and eventually unions push their wages back above that .
The interactions can get complex.
Basically
There is no such thing as a ‘free market’ in anything, and certainly not in labor. Markets only exist under some set of laws and regulations. Constraints differ between union labor and non-union labor, that is all.
That's why they're trying signing bonuses instead of wages and workers aren't biting.
Yes, exactly why.
A one time bonus that requires you to stay for x period is really exactly the same as a temporary wage increase. But actual people for emotional reasons perceive it differently than an increase in wage followed by a pay cut.
And govt treats bonuses different than wages in some ways that might benefit employers .
And sometimes sellers have certain gimmicks like sales and coupons used the same way. So they can temporarily decrease prices when they have excess supply without appearing to raise them later.
I have been mentioning stickiness in wages for a while. Good to see Kevin deal with the concept.
One thing he does not mention is that normal stickiness in wages is higher in the downward direction that the upside. Emotionally, it is far harder for employees to cut someone's pay and for employees to accept that then vice versa . If both employees and employers were totally rational non emotional actors , that source of stickiness would not exist. But they are not.
And downward stickiness causes upward stickiness when the economic condition is perceived to be temporary. Employers might be more willing to raise wages short term if they knew they could later easily reduce them when conditions return to normal. But, if they think they cannot, they will be reluctant to increase them.
Have wages ever been sticky downward? I suspect what is sticky downward are NOMINAL wages. Inflation corrected wages on the other hand are likely sticky upward. Only in periods of strong recovery after a recession can we observe them "unstuck" to an extent that matters.
Gosh, it's almost as if someone said exactly that in the article you are commenting on.
As a former hiring manager, I can attest to the MASSIVE problems that are created if new hires earn more than existing employees. Morale in the toilet, productivity down. It's really ugly. Basically, HR departments in large corporations forbid the practice.
In theory you could raise everyone's salary, but that is too expensive to contemplate.
Spot on.
Well, until Facebook comes to town and refuses to be part of the Oracle/Google/Apple hiring agreement...
Depends on the industry. Anecdotally, software developer wages are not sticky.