Monday, July 9, 2012

The slow adaptation of US wages to the fall in money income

This is based on a comment I made here.

George Selgin posted a challenge to market monetarist analysis which he has also attempted to answer and to which Scott Sumner has responded to particularly thoughtfully. Both the last two posts included this graph:

NGDP (US nominal GDP) fell in a heap, yet average hourly earnings kept growing, albeit at a slower rate. Both George Selgin and Scott Sumner have very sensible suggestions about possible reasons. Further factors which occur to me include that one consequences of persistent unemployment is that what might be called "competitive" supply narrows, as the insider-outsider gap grows, as Evan Soltas has pointed out nicely. That takes time to kick in, but it does mean the "natural rate" of unemployment increases just from having unemployment.

Secondly, the public sector is not so affected (i.e. it has a higher rate of earnings growth than the private sector).

Also, it is mainly hirings which change over the business cycle. While private sector earnings growth does seem to be tracking roughly CPI.  So, it seems employers are paying to keep the employees they have and they're not leaving so much.  Nominal wage stickiness is surely to a significant degree about preserving relationships with existing workers, so if those relationships are being "stretched out" that would slow down adjustment.

Finally, one way to adjust is to cut back hours worked, which would not show up in the average hourly earnings.