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Real wages are flexible now

Summary:
The restaurant used to pay you an hour, now they pay you “ an hour plus p = ?? of Covid-19.”  That new wage is a lower real wage. Of course some workers are quitting, others are trying to shift back to disability, and so on.  Those are movements along labor supply curves, not proof of sticky wages. Plus other employers are taking unprecedented latitude in shifting around work hours, demanding new levels of commitment, asking workers to scrub down surfaces more and wear masks, and above all offering weaker promotion ladders, etc. — all cuts in the real wage. I expect unemployment levels to rise to new and scary heights, and yes I do think the government should do something about that.  But if you are analyzing the status quo with “a sticky wage model,” that assumption is probably

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The restaurant used to pay you $13 an hour, now they pay you “$13 an hour plus p = ?? of Covid-19.”  That new wage is a lower real wage.

Of course some workers are quitting, others are trying to shift back to disability, and so on.  Those are movements along labor supply curves, not proof of sticky wages.

Plus other employers are taking unprecedented latitude in shifting around work hours, demanding new levels of commitment, asking workers to scrub down surfaces more and wear masks, and above all offering weaker promotion ladders, etc. — all cuts in the real wage.

I expect unemployment levels to rise to new and scary heights, and yes I do think the government should do something about that.  But if you are analyzing the status quo with “a sticky wage model,” that assumption is probably wrong.  Even though it is usually correct.

Of course at some point in the future I expect wages to become sticky again.  Perhaps that is how we will know things have stabilized.

“Flexible wages on the downside, sticky wages on the upside” is perhaps the best assumption at the moment.

A further lesson is that sticky wages are not the only driver of unemployment, and the “fixed cost of working” models of Richard Rogerson and others have been underrated for a long time (to oversimplify a bit, given fixed costs it is not worth everyone coming in to work at some levels of demand/productivity).

The post Real wages are flexible now appeared first on Marginal REVOLUTION.

Tyler Cowen
Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Cowen and Tabarrok have also ventured into online education by starting Marginal Revolution University. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, the Wall Street Journal, Forbes, Newsweek, and the Wilson Quarterly.

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