Why don't wages fall?

"Nominal wage rigidity" is one of the bigger gaps in theoretical economics.

One of the longstanding disconnects between empirical and theoretical economics is the fact of "nominal wage rigidity". This is the fact that, no matter what level inflation is, nominal pay cuts are incredibly rare. Most of the time, economics is concerned with "real" price levels – that is, prices taking inflation into account. That idea leads to the idea of "real" pay cuts – when your wage rises slower than inflation.

But while real pay cuts are relatively easy to force on employees, nominal ones – when the actual numerical value of their salary is reduced – are significantly harder.

In graphical form, that phenomenon looks like this, from the San Francisco Fed:

 

The dashed line represents the distribution on wage changes you would expect to see if the nominal value didn't matter – a lot of businesses cutting wages, and a lot increasing them, with a slight edge to those increasing them – hence the peak of the distribution is slightly to the right of the zero line.

The bars represent the actual wage changes – and that spike at zero is all the people piling up against downward nominal wage rigidity. (If inflation were higher, the peak of the distribution would be further to the right, and that spike would be smaller.)

But why does this happen? The Jacobin's Seth Ackerman, reporting on the downfall of US snack food manufacturer Hostess, quotes Truman Bewley's seminal 1999 book Why Wages Don’t Fall During a Recession. Bewley actually asked employers why they didn't cut wages:

All of the following are quotes from different interviewees: “I have never cut wages.” “I never froze or cut pay, and never will.” “[A pay cut] is out of the realm of consideration.” “Such a thing is just not done.” “I have never cut anyone’s pay.” “I know something real. Never cut wages.” Over and over, the employers talked about disastrous turnover, bad morale, little acts of sabotage that would sap profits and make their lives miserable.

“If I cut pay, people would leave out of rage, even though they have no place to go,” said the owner of a car dealership with 30 employees.

It took a lot of work for Bewley just to find any companies that had cut their workers’ pay. “At the end of most interviews, I asked whether the respondent knew of any firm that had recently cut pay, and few had heard of any,” he wrote. “All but a few accepted wage rigidity as a fact of life.” But after much searching, he did manage to track down 36 businesses that had cut pay in the past half-decade or so, and he was able to gather more detailed information for 16 of them. In 13 of the 16 cases, the pay cuts were 10% or less. Many of the cuts were explicitly temporary. Of the remaining three cases, at least one involved cuts in work hours to make up for the pay cut.

As Ackerman argues in his piece, nominal wage rigidity is a fact of economics, and one that nearly every employer learns to live with, even when times are hard. The argument – much expressed in the case of Hostess, which was forced to close after workers refused to accept a 30 per cent pay cut – that these pay cuts must occasionally be imposed to bring wages to a "competitive" level is thus absurd. The actual way to phrase it would be that the company was uncompetitive. A competitive company doesn't find itself in the position where it needs to push a hail-Mary attempt to desperately reclaim some extra value from its workers even as it knows they are unlikely to relinquish it.

Striking workers on the picket line outside a Hostess distribution centre. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Daily Mail
Show Hide image

Who "speaks for England" - and for that matter, what is "England"?

The Hollywood producer Sam Gold­wyn once demanded, “Let’s have some new clichés.” The Daily Mail, however, is always happiest with the old ones.

The Hollywood producer Sam Gold­wyn once demanded, “Let’s have some new clichés.” The Daily Mail, however, is always happiest with the old ones. It trotted out Leo Amery’s House of Commons call from September 1939, “Speak for England”, for the headline on a deranged leader that filled a picture-free front page on David Cameron’s “deal” to keep Britain in the EU.

Demands that somebody or other speak for England have followed thick and fast ever since Amery addressed his call to Labour’s Arthur Greenwood when Neville Chamberlain was still dithering over war with Hitler. Tory MPs shouted, “Speak for England!” when Michael Foot, the then Labour leader, rose in the Commons in 1982 after Argentina’s invasion of the Falklands. The Mail columnist Andrew Alexander called on Clare Short to “speak for England” over the Iraq War in 2003. “Can [Ed] Miliband speak for England?” Anthony Barnett asked in this very magazine in 2013. (Judging by the 2015 election result, one would say not.) “I speak for England,” claimed John Redwood last year. “Labour must speak for England,” countered Frank Field soon afterwards.

The Mail’s invocation of Amery was misconceived for two reasons. First, Amery wanted us to wage war in Europe in support of Hitler’s victims in Poland and elsewhere and in alliance with France, not to isolate ourselves from the continent. Second, “speak for England” in recent years has been used in support of “English votes for English laws”, following proposals for further devolution to Scotland. As the Mail was among the most adamant in demanding that Scots keep their noses out of English affairs, it’s a bit rich of it now to state “of course, by ‘England’. . . we mean the whole of the United Kingdom”.

 

EU immemorial

The Mail is also wrong in arguing that “we are at a crossroads in our island history”. The suggestion that the choice is between “submitting to a statist, unelected bureaucracy in Brussels” and reclaiming our ancient island liberties is pure nonsense. In the long run, withdrawing from the EU will make little difference. Levels of immigration will be determined, as they always have been, mainly by employers’ demands for labour and the difficulties of policing the borders of a country that has become a leading international transport hub. The terms on which we continue to trade with EU members will be determined largely by unelected bureaucrats in Brussels after discussions with unelected bureaucrats in London.

The British are bored by the EU and the interminable Westminster arguments. If voters support Brexit, it will probably be because they then expect to hear no more on the subject. They will be sadly mistaken. The withdrawal negotiations will take years, with the Farages and Duncan Smiths still foaming at the mouth, Cameron still claiming phoney victories and Angela Merkel, François Hollande and the dreaded Jean-Claude Juncker playing a bigger part in our lives than ever.

 

An empty cabinet

Meanwhile, one wonders what has become of Jeremy Corbyn or, indeed, the rest of the shadow cabinet. The Mail’s “speak for England” leader excoriated him for not mentioning “the Number One subject of the hour” at PM’s Questions but instead asking about a shortage of therapeutic radiographers in the NHS. In fact, the NHS’s problems – almost wholly caused by Tory “reforms” and spending cuts – would concern more people than does our future in the EU. But radiographers are hardly headline news, and Corbyn and his team seem unable to get anything into the nation’s “any other business”, never mind to the top of its agenda.

Public services deteriorate by the day, George Osborne’s fiscal plans look increasingly awry, and attempts to wring tax receipts out of big corporations appear hopelessly inadequate. Yet since Christmas I have hardly seen a shadow minister featured in the papers or spotted one on TV, except to say something about Trident, another subject that most voters don’t care about.

 

Incurable prose

According to the Guardian’s admirable but (let’s be honest) rather tedious series celeb­rating the NHS, a US health-care firm has advised investors that “privatisation of the UK marketplace . . . should create organic and de novo opportunities”. I have no idea what this means, though it sounds ominous. But I am quite certain I don’t want my local hospital or GP practice run by people who write prose like that.

 

Fashionable Foxes

My home-town football team, Leicester City, are normally so unfashionable that they’re not even fashionable in Leicester, where the smart set mostly watch the rugby union team Leicester Tigers. Even when they installed themselves near the top of the Premier League before Christmas, newspapers scarcely noticed them.

Now, with the Foxes five points clear at the top and 7-4 favourites for their first title, that mistake is corrected and the sports pages are running out of superlatives, a comparison with Barcelona being the most improbable. Even I, not a football enthusiast, have watched a few matches. If more football were played as Leicester play it – moving at speed towards their opponents’ goal rather than aimlessly weaving pretty patterns in midfield – I would watch the game more.

Nevertheless, I recall 1963, when Leicester headed the old First Division with five games to play. They picked up only one more point and finished fourth, nine points adrift of the league winners, Everton.

 

Gum unstuck

No, I don’t chew toothpaste to stop me smoking, as the last week’s column strangely suggested. I chew Nicorette gum, a reference written at some stage but somehow lost (probably by me) before it reached print.

Editor: The chief sub apologises for this mistake, which was hers

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle