FULL EMPLOYMENT AND LAGGING WAGES...WHY THE DISCONNECT?

The Author Rob remembers reading some letters responding to a blog article that lamented that despite the high demand for legal services, lawyers would not lower their costs to meet the demand.

One guy wrote in with something like “Supply meet Demand.”

The Author Rob did not respond, but anyone that has studied microeconomics should know that supply and demand usually meet at one point, ceteris paribus ,if at all.  There is mega demand for new Corvettes at $10,000. There is an unlimited supply of nurses at $100 per hour.  Simple economics that the guy probably forgot to consider. No harm, no foul.

WHY ARE PAYCHECKS FROZEN IN PLACE?

 Wages have only increased 2.5 % in the last 12 months. Yet there are help-wanted signs on every marquee. It turns out there are a lot of reasons why wages are lagging despite the result that would  be expected. There are several of them and looking them is illustrative of principles that extend across the graph.

1.     1. We got Long Memories. Wages have lagged for so long that workers, who remember the ugly days of the Great Recession, are reticent to ask for too much, even in these good times. And employers, so long used to pounding down wages for employees that were grateful for any job, have combined to create a negative feedback loop, or a vicious cycle.

In an article entitled “Why can’t Employees get Raises?” by Daniel Gross, “This amounts to a mutually reinforcing feedback loop. Companies are psychologically and emotionally geared not to raise wages as a matter of course. And many people who work are reluctant to aggressively ask for higher wages, or to quit and seek a better opportunity.”  

2.    2. Employers Want More Proof.  Despite the good economics numbers, there are doubts among employers and economists. The economic agenda of trump is stalled and political uncertainty is the touch word.

 “This is an unprecedented level of political uncertainty,’ said William E. Spriggs, chief economist for the A.F.L.-C.I.O. “That is creating a drag on the economy.’

“Juanita Duggan, chief executive of the National Federation of Independent Businesses, said, ‘Small-business owners seem to be in a holding pattern while they wait to see what Congress will do with taxes and health care.”

3.     What goes Up does not Always Come Down.  The reason that wages are rising slowly, if at all, may also reflect a certain type of wage “stickiness.”  Wage stickiness, or nominal rigidity*, posits that workers are very resistant to cuts in wages. Thus wages are nonelastic and employees will resign before taking wage cuts. So the converse may be true on the employer side. Raising wages without confirmation of a more robust economy leaves an employer that is suddenly overstaffed when business conditions drop with high labor costs. 

These are just some thoughts on the issue. But the Authors see the shades of tight labor markets most everywhere. On store signs that should be advertising sandwich and milk shake prices, there is “Help Wanted” in bold and desperate letters. 

*Wow, but could my bros Beavis and Butt-Head have some fun with the term "nominal rigidity."

VERY LITTLE IS STICKY IN THE DESERT OF THE REAL. THINGS RUN LIKE THEY ARE BUILT ON RAILS.