I’ve been very curious about what you all believe about wage rigidity. So, there’s the question: do you believe wages are sticky downwards?
according to you prices are random. i guess they are ‘stuck’ to wherever they are.
What’s the time frame?
Yes they are sticky, but not for praxeological or psychological reasons, but because of policy that distorts the free market.
Alchian, who while not Austrian does seem to be greatly appreciated by many Austrians, argues that there can be solid economic reasons for sticky wages, specifically that it may be in the worker’s best interest to refuse a wage cut and lose his job in order to search for better jobs elsewhere.
Coase, what you’re describing is just supply and demand at work, not sticky wages.
You believe all wage stickiness is explicable by government policy?
Could you list those policies, please?
Its psychological speculation. They might be sticky. Donno. Test it. /yawn.
Monetary policy. Minumum wages. Unionized labor contracts.
Coase, That a wage-earner refuse a lower wage does not make wages sticky. A wage-earner ultimately does not decide whether or not the employer wants to pay him the wage asked for. As such, if the wage-earner does not want to accept a lower wage that wage-earner effectively becomes voluntarily unemployed. However, wages themselves still move downwards.
To be fair, some Austrians that are proponents of Monetary Equilibrium Theory do believe, to some degree, that prices are indeed sticky downwards, but only under the condition of what they call monetary disequilibrium, that is, when there prevails a wide spread economic excess demand to hold money.
Sticky wages are wages that are resistant to change, no? Then doesn’t the above situation describe sticky wages? Alchian simply explains it in terms of imperfect information and the costs of acquiring information rather than, say, animal spirits. I suppose following from this it could be argued that “sticky wages” is a poor/useless/meaningless way of looking at the problem, an argument I may be inclined to agree with, but strictly speaking it is addressing sticky wages.
Do i need to point out that if you are unemployed your wage has dropped to zero ?
Neoclassical,
I am a little wary of joining the fray, but I will against my common sense. 
I argue that wages, in a completely free labor market, are “sticky” to the degree at which an employer is bounded by the following:
- Difficult to break, without incurring greater costs, labor contracts guarateeing wages for a finite and defined period of time.
- The notion that lower wages willl lead to lower productivity, and as such the employer decides to maintain wage levels.
- Similar to above, lag-time between the beginning of deflation and the decision to cut wages, caused by an array of reasons, mostly related to not immediately knowing how much wages need to fall to maintain profits.
Nevertheless, I hold that in a free market the labor market will still move back towards equilibrium, even if the movement is not as smooth as some may like to ascribe it when elucidating their theory.
Jonathan M. F. Catalán, I bet you’re hiding beautiful eyes behind those sunglasses.
That was an excellent reply. I do wonder if Austrians, on average, would agree, though.
Coase,
As NirgrahamUK writes (not necessarily in response to you), when you are unemployed your wage has effectively fallen to zero. Sticky wages refers to the notion that wages may not fall enough to restore equilibrium in the labor market, largely because of contractual obligation, and as such this creates long-term unemployment. As such, the only reason there would be wage stickyness is because there is an obligation by part of the employer to retain high wages. With no contractual obligation, it doesn’t really matter what wage the wage-earner wants. He will either be laid off, or he will have to accept a lower wage. As such, I don’t see why high reservation wages would cause stickyness by themselves.
Jonathan,
Alchian’s argument, if I understand it, is essentially as follows: If an employee has to pick between a wage cut and unemployment, it can be rational to choose the latter in order to search for a better job. Essentially the worker has become self-employed, and his task is looking for a job. This is fine if wages have lowered only in the particular sector he was working in. But suppose aggregate demand has fallen, and employees are unaware of this. Many might accept unemployment over a wage cut for the rational reasons I just described, but they would not be able to find a better job quickly because AD has fallen. At first the lack of success may be attributed to bad luck, and so the search will be extended. If the fall in AD is a continuous problem (exacerbated perhaps by high unemployment) unemployment will remain high during the decrease in AD. The change in AD confuses their expectations, and so workers don’t respond efficiently (in the neoclassical sense). Wages are sticky as long as AD is lessening.
The essay I’m referencing, “Production, Information Costs, and Economic Organization,” is available on JSTOR for those of you who haven’t read it and have access to JSTOR. It’s quite interesting.
Coase, I would argue that would be relevant only if the searching party was looking for a high nominal wage, one that the market could no longer deliver.
Yes. I’m sorry if that wasn’t clear from my explanation.
"You believe all wage stickiness is explicable by government policy?
Could you list those policies, please?"
I think at least a contributing factor is that the regular monetary inflation of The Fed has conditioned workers to expect their nominal wages to increase over time, and to forget the possibility that a nominal wage decrease does not necessarily constitute a real wage decrease because with recent monetary policy they can’t remember a time when that’s ever been the case.