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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Commons Confidential: Dave's picnic with Dacre

Revenge is a dish best served cold from a wicker hamper.

Sulking David Cameron can’t forgive the Daily Mail editor, Paul Dacre, for his role in his downfall. The unrelenting hostility of the self-appointed voice of Middle England to the Remain cause felt pivotal to the defeat. So, what a glorious coincidence it was that they found themselves picnicking a couple of motors apart before England beat Scotland at Twickenham. My snout recalled Cameron studiously peering in the opposite direction. On Dacre’s face was the smile of an assassin. Revenge is a dish best served cold from a wicker hamper.

The good news is that since Jeremy Corbyn let Theresa May off the Budget hook at Prime Minister’s Questions, most of his MPs no longer hate him. The bad news is that many now openly express their pity. It is whispered that Corbyn’s office made it clear that he didn’t wish to sit next to Tony Blair at the unveiling of the Iraq and Afghanistan war memorial in London. His desire for distance was probably reciprocated, as Comrade Corbyn wanted Brigadier Blair to be charged with war crimes. Fighting old battles is easier than beating the Tories.

Brexit is a ticket to travel. The Independent Parliamentary Standards Authority is lifting its three-trip cap on funded journeys to Europe for MPs. The idea of paying for as many cross-Channel visits as a politician can enjoy reminds me of Denis MacShane. Under the old limits, he ended up in the clink for fiddling accounts to fund his Continental missionary work. If the new rule was applied retrospectively, perhaps the former Labour minister should be entitled to get his seat back and compensation?

The word in Ukip is that Paul Nuttall, OBE VC KG – the ridiculed former Premier League professional footballer and England 1966 World Cup winner – has cold feet after his Stoke mauling about standing in a by-election in Leigh (assuming that Andy Burnham is elected mayor of Greater Manchester in May). The electorate already knows his Walter Mitty act too well.

A senior Labour MP, who demanded anonymity, revealed that she had received a letter after Leicester’s Keith Vaz paid men to entertain him. Vaz had posed as Jim the washing machine man. Why, asked the complainant, wasn’t this second job listed in the register of members’ interests? She’s avoiding writing a reply.

Years ago, this column unearthed and ridiculed the early journalism of George Osborne, who must be the least qualified newspaper editor in history. The cabinet lackey Ben “Selwyn” Gummer’s feeble intervention in the Osborne debate has put him on our radar. We are now watching him and will be reporting back. My snouts are already unearthing interesting information.

Kevin Maguire is the associate editor (politics) of the Daily Mirror

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution