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.

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No, David Cameron’s speech was not “left wing”

Come on, guys.

There is a strange journalistic phenomenon that occurs when a party leader makes a speech. It is a blend of groupthink, relief, utter certainty, and online backslapping. It happened particularly quickly after David Cameron’s speech to Tory party conference today. A few pundits decided that – because he mentioned, like, diversity and social mobility – this was a centre-left speech. A leftwing speech, even. Or at least a clear grab for the liberal centre ground. And so that’s what everyone now believes. The analysis is decided. The commentary is written. Thank God for that.

Really? It’s quite easy, even as one of those nasty, wicked Tories, to mention that you actually don’t much like racism, and point out that you’d quite like poor children to get jobs, without moving onto Labour's "territory". Which normal person is in favour of discriminating against someone on the basis of race, or blocking opportunity on the basis of class? Of course he’s against that. He’s a politician operating in a liberal democracy. And this isn’t Ukip conference.

Looking at the whole package, it was actually quite a rightwing speech. It was a paean to defence – championing drones, protecting Britain from the evils of the world, and getting all excited about “launching the biggest aircraft carriers in our history”.

It was a festival of flagwaving guff about the British “character”, a celebration of shoehorning our history chronologically onto the curriculum, looking towards a “Greater Britain”, asking for more “national pride”. There was even a Bake Off pun.

He also deployed the illiberal device of inculcating a divide-and-rule fear of the “shadow of extremism – hanging over every single one of us”, informing us that children in UK madrassas are having their “heads filled with poison and their hearts filled with hate”, and saying Britain shouldn’t be “overwhelmed” with refugees, before quickly changing the subject to ousting Assad. How unashamedly centrist, of you, Mr Prime Minister.

Benefit cuts and a reduction of tax credits will mean the Prime Minister’s enthusiasm for “equality of opportunity, as opposed to equality of outcome” will be just that – with the outcome pretty bleak for those who end up losing any opportunity that comes with state support. And his excitement about diversity in his cabinet rings a little hollow the day following a tubthumping anti-immigration speech from his Home Secretary.

If this year's Tory conference wins the party votes, it’ll be because of its conservative commitment – not lefty love bombing.

Anoosh Chakelian is deputy web editor at the New Statesman.