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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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.