Friday, October 12, 2012

Thoughts on wage stickiness

Based on a comment I made here.

Nominal wage stickiness is about contracts being written in nominal terms. But, given heterogeneous consumption/investment bundles/preferences, how else could contracts plausibly be written?  Money is not only a (largely "the") transaction good, it is, in effect, the common language of transaction and so of contract -- hence a sort of "network" effect of being the unit, indeed medium, of account where your income contract is tied into your expenditure contracts.

Given utilities and debt contracts are also in the same "language", and given we are social beings very concerned with status and standing (our notions of fairness are often about status while a strong element in bargaining is not losing "standing" for future interactions), there are powerful reasons for wage stickiness. Even when one hires new workers.

Possibly, in earlier times, when many industrial workers were ex-agrarian workers and used to rising and lowering prices for products across seasons, wage flexibility was more acceptable.  But once we got plugged into debt, utilities, etc; not nearly so much.

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