" but he can’t because potential employees think they are worth more than the lower price offers them, not recognizing that AD has fallen"
A fall in aggregate demand does not cause a wide spread fall in wages.
But it should, thus sticky wages.
Coase,
The employer, in Alchian’s model, would like to fire his workers and hire new ones at a lower price, but he can’t because potential employees think they are worth more than the lower price offers them, not recognizing that AD has fallen. They will search for better offers elsewhere instead of accepting the lower price.
And the employer will effectively tell them, “good luck”. Just because the employees think they are worth more, doesn’t mean that the employer agrees. Without contractual obligation, there is nothing stopping the employer from letting them go. Those with experience in the labor market will tell you that there will always be someone willing to do the job for a lower wage, and so it’s exceptionally unrealistic to assume that all potential wage-earners will refuse to agree to a job without the retention of the original wage. This is especially true knowing that not all wages in the market are the same, and as such there will consistently be people working for lower wages in other sectors of the market.
“If they knew that AD has fallen, they would sell their services at a lower price rather than remain unemployed. Employers and employees are worse off.”
Coase,
If I knew I could pay $400 less with Geico, then I wouldn’t have wasted my time getting quotes from AIG. So I am worst off because I could have saved myself the cost of wasting my time. Alchian’s model then fits my situation also, no?
In fact, Alchian’s model according to your exposition of it, seems to make the startling discovery that the market is dynamic and prices are determined by people bidding against each other.
But it should, thus sticky wages.
No it should not. Not unless a fall in aggregate demand is accompanied by an increase in demand to hold money.
To be exact: in Austrian theory there is no such thing as the agreggate concept of ‘employment’: there is only ‘wagelabor’ and ‘self employment’ as useful concepts. (Minimumwages, strictly speaking, don’t cause ‘unemployment’; they cause self employment due to the restrictions in possibilities that are availble to that person. But for all heuritic purposes ‘minimumwage causes unemployment’ will do.)
When Mises talks about ‘unemployment impossible in a free market’; he’s talking about something like the ERE; where there can be only ‘voluntary unemployment’ or self employment. He’s engaging in an argument against Keynesian like people who think that the free market can have structural unemployment even if all goes well.
Saying that there is such a thing as ‘sticky wages’ who ‘cause’ unemployment, is ‘proving’ that the market isn’t perfect. I know that neo classicals have to proof that the market isn’t perfect, but Austrians are perfectly aware of this and have incorporated that into their thinking ever since 1871. But thanks for the concern.
Jonathan,
Certainly unemployment won’t be 100%, and prices won’t stop changin. They’re sticky, not frozen. I probably made the point sound stronger than it is. But no one would work for less than they’re worth; by definition if you do so you’ve voluntarily given up a better-paying job elsewhere. If a lot of people (say, 10% of the labor force) think that they’re worth more than what employers are offering them, you get “sticky” wages that won’t drop as much as they should and high unemployment as a result.
DD5,
No it should not. Not unless a fall in aggregate demand is accompanied by an increase in demand to hold money.
Alchian’s model is for a situation in which the efficient outcome is for prices to be falling in response to AD, but prices are not falling. I won’t pretend to understand monetary economics, so I won’t attempt to discuss the various possible reasons prices should be falling. This model takes falling prices as the efficient outcome as given. I honestly don’t understand why that should be so, but it’s not strictly relevant. If you know, fill in the gap for yourself. The model seeks to explain sticky wages under those constraints.
If I knew I could pay $400 less with Geico, then I wouldn’t have wasted my time getting quotes from AIG. So I am worst off because I could have saved myself the cost of wasting my time. Alchian’s model then fits my situation also, no?
In fact, Alchian’s model according to your exposition of it, seems to make the startling discovery that the market is dynamic and prices are determined by people bidding against each other.
Of course a lack of perfect information makes you worse off. The issue more specifically is one of unrealistic expectations. Suppose you “know” that the price of insurance is $1000 (random number). Unbeknownst to you, demand for insurance has risen and you get an insurance offer for $1200. You will refuse it because you “know” that a $1000 offer is right around the corner.
If you have access to JSTOR, you should really read his essay, as I have clearly done a poor job of explaining it. It’s not a particularly long or challenging read, and it’s very interesting.
"The issue more specifically is one of unrealistic expectations. "
Every house that is put on the market and is not sold the following day can only be the result of “unrealistic expectations” by potentially both buyers and sellers. All prices are determined by initially unrealistic expectations. When ever there is a change in supply and/or demand, there must be false expectations by both sellers and buyers, otherwise the correct price would be always determined instantaneously. This would make all prices “sticky” everywhere and all the time. Again, how is Alchian’s model not simply illustrating a specific example of the fact that the market is a discovery process, in the Hayekian sense, yet instead of realizing that this is the natural state of of the market process, as oppose to the fallacious static modeling that he is use to, he goes to devise some model that he thinks is unique.
Yes.
DD5,
A lot of brilliant economics, stated a certain way, sounds pretty obvious. That’s probably one way of identifying a good economist.
In Alchian’s model, workers refuse to adjust their unrealistic expectations to the new reality because they do not realize that AD has fallen. That is what makes wages sticky. Of course prices do not adjust instantaneously (and as Alchian explains in another essay that can often be a good thing), so in a sense all prices are sticky, but of course that is not what is meant when one says that prices are sticky. Alchian’s explanation is of why wages under certain circumstances don’t adjust normally.
As for Alchian, while not an Austrian economist, he is often well-respected by Austrian economists because he sometimes says things that sound very Austrian. The essay that made him famous, for example, is something any Austrian can appreciate.
Bewley has good stuff on wage rigidity as well.
I thought that the main reason for bringing up sticky wages would be for an anti-deflation policy. That workers wouldn’t be able to ‘get’ (at least initially) that even though their nominal wages were decreasing, their real wages were staying the same or even increasing.
I don’t see how someone that was spouting of rational expectations stuff in ABCT (why wouldn’t the entrepreneurs adjust) also apply this to the laborers. Surely after one or two cycles they would see that it wouldn’t make sense to quit their job when offered a pay cut, because all the other jobs they could get would be at a similar sort of wage, and that all their friends who kept their jobs with the pay cut were actually doing fine.
I also think there could be creative ways that employers could deal with this issue, if it was an issue. Such as offering more benefits and presenting the change as a swap. instead of a pay cut. This would make it more obvious to the employee that prices were falling faster than wages.
And if we are talking about falling wages in a non deflationary environment, wouldn’t that be more of a firm by firm issue, and not something likely to happen on a large scale all at once? Although under those circumstances, one might expect the employee who quit instead of accepting less pay might be able to, or at least would be more likely to find an offer at his old wage rate (depending on wether he was overpaid at his old job, and hence the pay cuts, or if that firm was just inefficient)
Esuric, are you Croatian?
Yeah
Lijepa naša domovina Hrvatska!
Da, tija sam ici ovaj ljeto ali moram da pisem za skola. Odakle si?.
My dad is from Kiseljak. My mom is from Busovača. I was born here, though. But all I speak with my parents is Croatian. I want to go sometime soon, too.
Glad to see a hrvat here!
If you guys are going next summer, we should meet up somewhere.
Neoclassical, you can pick me up in Livno on the way to the beach. 
^^^^^
Good luck finding an average Austrian ordinally.