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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The attack on Les Bleus was an attack on the soul of France - that's why Euro 2016 must go ahead

As a continent reels politically from the refugee crisis and emotionally from the Paris attacks, football must find a new, confident voice.

After the Paris attacks, the great Bill Shankly’s words have rarely been so tested: “Some people believe football is a matter of life and death. I am very disappointed with that attitude. I can assure you, it is much, much more important than that.”

As bombers detonated their suicide belts outside the Stade de France, French and German football fans cheered what they thought were fireworks. They were unaware that it was the opening salvo in a night of barbarity. One of the bombers had a ticket for the game but, mercifully, was turned back at the turnstile. Had his bomb gone off inside the stadium, the immediate loss of life, plus the panicked stampede and two more suicide bombers lying in wait outside for escaping fans, could have produced a death toll higher than at Hillsborough, Bradford, Heysel or either of the Ibrox ­stadium disasters.

The French intelligence services have yet to conclude publicly whether the attacks were timed to coincide with the prestigious friendly or whether the crowd of 80,000 was simply another target of bloodthirsty convenience on an already preordained date. Either way, there’s no mistaking that an attack on Les Bleus was an attack on the soul of France. In the aftermath, the Germany-Netherlands friendly game was called off and Belgian football went into lockdown.

How should British football respond? To those who think that the sport is just 22 players kicking a ball around a field, this may seem a peculiar question. But ever since the tail end of the 19th century, when football escaped from its self-enforced ghettoisation in Britain’s public schools, it has had a greater purpose.

More than any other sport, football has been intertwined with politics. As Harold Wilson said: “It’s a way of life . . . a religion.” When President Rowhani of Iran wanted to bolster his image as a new kind of leader, he didn’t deliver a speech but tweeted a picture of himself wearing an Iranian football top, watching a match. Franco’s dictatorship clung to the all-conquering Real Madrid and punished FC Barcelona. On Robben Island, ANC prisoners idolised Billy Bremner of Leeds United and successfully demanded the right to play football.

In October, one of the biggest protests against the closure of the north-east’s steelworks was from 10,000 Middlesbrough fans at Old Trafford. When Catalans challenged hikes in transport costs, they boycotted public transport from the Camp Nou. The biggest “Refugees Welcome” signs in Europe weren’t produced by governments but by fans of the Bundesliga champions, ­Bayern Munich.

So while the singing of the Marseillaise at the England-France match at Wembley was a “hairs on the back of the neck” moment, most of us understand that it’s not enough. What is less well known is that this wasn’t the first time that one of the world’s few genuinely inspiring anthems has been performed in earnest in British football. A century ago, bands took to the pitch to play patriotic British, French and Russian music – not out of altruism but military necessity. The British army was under intense pressure at Ypres and urgently needed new volunteers. The War Office turned to football.

For many, the journey to Loos, Flanders and the Somme started with a routine visit to cheer on their local team. Their sport transported them from a home football field to their foreign killing fields. Many clubs, including Everton, held military training on their pitches, while Manchester City’s then stadium, Hyde Road, became a 300-horse stable. Hundreds of players died serving in the Football Battalion.

But for too long our national sport reflected Britain’s lack of ease with diversity. From the 1920s, the religious sectarianism that poisoned the west of Scotland was allowed to fester in Glasgow’s football. The sport’s tolerance of recreational racism became widespread. Outside stadiums, right-wing extremists sold their propaganda while, inside, black players were vilified – even by their own supporters. Football’s racism corroded its heart and was rationalised in its head: it was allowed on the pitch, cele­brated on the terraces and accepted in the boardroom and far too many changing rooms.

And now, as a continent reels politically from the refugee crisis and emotionally from the Paris attacks, football must find a new, confident voice. The sport and its fans cannot sit on the subs’ bench at a time like this.

In a nation where only one in five male workers joins a trade union, football is a rare regular collective experience. It is more authentic than click-and-connect social media communities. Despite high ticket prices, football offers the one place where thousands of working-class men, including many politically disenchanted young men, come together in a common cause.

British football has long since jettisoned its ambivalence regarding racism. But for organised extreme right-wingers, Islamophobia fills the space vacated by the anti-Irish “No Surrender” tendency on the sport’s fringes. Although the number of top-flight British Muslim players is infinitesimally small, the streets of Bradford, Blackburn and Birmingham teem with young British Muslims kicking a football. More clubs can harness their power to inspire and increase their ­involvement in community counter-­radicalisation strategies. Clubs should also take the lead by having zero tolerance for Islamophobia, training stewards and backing fans who stand up to fellow supporters.

And, finally, the European Championships, for which all the home nations bar Scotland have qualified, must go ahead in France next summer. There’s no liberté in cancelling. In the name of fraternité, let’s all back France as our second team. Allez les Bleus!

Jim Murphy is the former Labour MP for East Renfrewshire and leader of Scottish Labour 2014-15.

This article first appeared in the 26 November 2015 issue of the New Statesman, Terror vs the State