Nominal Wages and Behavioral Postulates

Bryan:

I don’t disagree with what your arguments here.

But, I had one addition. Suppose that the firms believe that soon (who knows exactly when) nominal expenditures will rise?

Does a firm want the reputation of taking advantage of market conditions to exploit workers, when before long, nominal demand will rise and you can hire them all back at fair wages?

If the decreased nominal expenditure was known to be permanent, perhaps the profit of “taking advantage” of workers would become tempting.

If the low nominal expenditures persist, so that it is begining to look permanent, perhaps the same is true.

If, on the other hand, you are used to nominal expenditures dropping for six months or a year, and then rapidly rising again, why go through a bunch of conflict for maybe a few months of gain?

If nominal expenditure falls, and then doesn’t rise like usual, or just falls and falls, then the response of just waiting it out looks like a mistake.

My “solution” is to keep nominal expenditures from falling and if the do fall, raise them back ASAP.

But I do think this policy will make wages more sticky than they would be if people thought there was a good chance that decreases in nominal expenditures are permanent.

Why in the world would I care if my employers hired someone new for a lower salary? I might care if an equally qualified new hire for the same job got a higher wage than me (hey, I’ve been here longer!), but why would I care if he got a lower salary? In fact, my employer just hired 3 new people at lower wages than the rest of us and I, nor anyone else currently employed, particularly cared. Granted, I’m just in high school so I’m doing unskilled labor so the wage differential in absolute terms is rather small, but I don’t think I would care even if we were talking about much larger absolute differentials. I would imagine a new recruit might resent being hired at a lower wage, but I certainly wouldn’t care.

I don’t have time to read that paper you linked too, but on a brief skimming it doesn’t seem to provide any evidence of insider-outsider mechanisms working when the new hire is receiving a lower wage. Perhaps you could highlight the passage that suggests that since that results makes no intuitive sense to me. It would only seem to make sense if the new hire got a higher wage.

Also, on the topic of explaining why people aren’t being hired I have a small theory that I’ve been thinking about for a bit that I’ve love to explore more formally. I think, for the most part, producers and employers are largely inattentive when times are good (I’m adapting some thinking from the “rational inattention” literature)- because that seems to be human nature. If you really wanted to be “formal” about it, you can argue that information-processing for improving your business plan is “costly.” They don’t update their business models; prices respond slowly to monetary policy etc. I argue, both from common sense and experience, that inefficiencies in a business build up over time. Small inefficiencies here, small inefficiencies there etc. And over time they build up to something substantial. In the good times, producers and employers don’t notice these because their bottom line is still good – humans are habit-forming / inattentive and so when the bottom line is positive and your inefficiencies don’t matter, you are unlikely to evaluate your business plan – the cognitive and effort costs are too high for you. So, what does a recession do? A recession is a bit like a shock to the business model, particularly in more severe recessions. All of the sudden the producer realizes his bottom-line is potentially threatened by the recession so he scrambles to find ways to improve his firm and keep output and profits up. In other words, it’s only worthwhile to pay the “cost” of information processing when a recession hits. Suddenly he discovers he’s let all this wasteful stuff build up. Why am I using this phone company when this one is cheaper? Why are these two idiots still here, they have never contributed anything to the company? Why am I still using this outdated old technology when the new technology is better? All of those things would increase efficiency, and so the response of employers to new hires would be muted because they simply wouldn’t need them. Hiring would only increase as more employees are needed as more demand exists (so there is a partial aggregate demand story), but because they are so much more efficient you need more aggregate demand than a historical-perspective from the recent boom would suggest.

It would be relatively straight forward to include the idea of firm inefficiencies accumulating due to rational inattention in the Reis / Mankiw / Sims-type framework and I think it would be something worthwhile. Whether or not this idea is correct is an empirical question that would likely be difficult to capture in the data (one might have to resort to the dreaded SURVEY!), but I think the idea is intuitively plausible.

Mr. Caplan,

What you’re describing almost sounds like the opposite of “efficiency wages,” in that paying people less actually causes them to be less productive.