Screw Your Analysis to the Sticky Point, by Paul Krugman, in NY Times: Via Mark Thoma, a new paper from the San Francisco Fed offers stunning evidence on downward nominal wage rigidity, a topic I’ve written about before.
What the paper shows is that many, many workers are getting precisely zero wage growth in dollar terms:
And there has been a sharp increase in the fraction of zero-wage-change workers:
These observations have huge implications for policy. Let me stress two implications, in particular:
1. The prevalence of zero-change wages constitutes overwhelming evidence that we’re suffering from lack of demand, not lack of supply. It also undercuts one of the favorite arguments of those claiming that we really do have a supply-side problem, the persistence of (low) inflation and positive wage growth despite the low level of employment. The reason we have positive wage growth is that workers with a good bargaining position are still managing to eke out increases, while those without aren’t facing wage cuts. More on that later today, when I have time.
2. The stickiness of wages even in the United States — which has one of the most “flexible”, aka brutal, labor markets in the advanced world, makes it clear just how huge the costs of the eurozone strategy of “internal devaluation” — getting wages down in peripheral economies, until competitiveness is regained — really is. By asking that Ireland, Spain, Portugal achieve double-digit falls in nominal wages, the Germans and the ECB are actually demanding something that basically never happens.
Very important stuff.
Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation.