Friday, May 29, 2015

Some Evidence on why Wages tend to be Inflexible Downwards

Some very interesting papers on wage rigidity and why money wages tend to be flexible downwards and why even business people prefer not to cut nominal wages:
(1) Du Caju, P., Kosma, T., Lawless, M., Messina, J. and T. Rõõm. 2013. “Why Firms Avoid Cutting Wages: Survey Evidence from European Firms,” Central Bank of Ireland, Research Technical Papers 03/RT/13
http://www.centralbank.ie/publications/Documents/03RT13.pdf

The summary of this paper:
“This paper uses evidence from a firm survey conducted in a number of EU countries to investigate a range of different theories as to why firms appear reluctant to lower wages. The sample covers 14,975 firms from 14 European countries, representing around 47.3 million employees. .... Across all countries and sectors, the two most important causes for avoiding base wage cuts are the belief that this would result in a reduction in morale or effort and the danger that the most productive workers would leave as a consequence.” (Du Caju et al. 2013: 2).
(2) Kube, Sebastian, Maréchal, Michel André, and Clemens Puppe. 2013. “Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment,” Journal of the European Economic Association 11.4: 853–870.

A brief summary of the paper:
“We conducted a field experiment to test whether workers reciprocate wage cuts and raises with low or high work productivity. Wage cuts had a detrimental and persistent impact on productivity, reducing average output by more than 20%.” (Kube et al. 2013: 853).
(3) Campbell, Carl M. and Kunal S. Kamlani. 1997. “The Reasons for Wage Rigidity: Evidence from a Survey of Firms,” The Quarterly Journal of Economics 112.3: 759–789.

A quick summary of their survey of US firms:
“A survey of 184 firms was conducted to investigate the reasons for wage rigidity. The strongest support was found for explanations based on adverse selection in quits and on the effect of wages on effort. In addition, survey respondents indicated that reducing turnover is an important explanation of wage rigidity for white-collar workers, and that implicit contracts are an important explanation for other workers.” (Campbell 1997: 759).
(4) Agell, Jonas and Per Lundborg. 2003. “Survey Evidence on Wage Rigidity: Sweden in the 1990s,” Scandinavian Journal of Economics 105.1: 15–29.

A summary:
“We document the results of a repeat survey, which updates Agell and Lundborg (1995), on wage rigidity in a sample of 159 Swedish manufacturing firms, conducted during the severe Swedish recession of the 1990s. It is found that not even a prolonged period of very high unemployment and quite low inflation softened workers’ resistance to wage cuts.” (Agell and Lundborg 2003: 15).
BIBLIOGRAPHY
Agell, Jonas and Per Lundborg. 2003. “Survey Evidence on Wage Rigidity: Sweden in the 1990s,” Scandinavian Journal of Economics 105.1: 15–29.

Campbell, Carl M. and Kunal S. Kamlani. 1997. “The Reasons for Wage Rigidity: Evidence From a Survey of Firms,” The Quarterly Journal of Economics 112.3: 759–789.

Du Caju, P., Kosma, T., Lawless, M., Messina, J. and T. Rõõm. 2013. “Why Firms Avoid Cutting Wages: Survey Evidence from European Firms,” Central Bank of Ireland, Research Technical Papers 03/RT/13
http://www.centralbank.ie/publications/Documents/03RT13.pdf

Kube, Sebastian, Maréchal, Michel André, and Clemens Puppe. 2013. “Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment,” Journal of the European Economic Association 11.4: 853–870.

Monday, May 25, 2015

Malthus on Nominal Wage Rigidity

And some people think that downwards nominal wage rigidity is a product of modern economies from the 20th century:
It very rarely happens that the nominal price of labour universally falls; but we well know that it frequently remains the same, while the nominal price of provisions has been gradually increasing. This is, in effect, a real fall in the price of labour; and during this period, the condition of the lower orders of the community must gradually grow worse and worse.” (Malthus 1798: 34–35).
This appears in the Reverend Thomas Malthus’ (1766–1834) famous An Essay on the Principle of Population (which is available here) already in the first edition of 1798, but also in subsequent editions (e.g., Malthus 1803: 14–15).

Presumably money wages were not as inflexible downwards as they are today, but in Malthus’ time were apparently still relatively inflexible enough to merit comment as though this was reasonably well known.

Now the evidence would strongly suggest that in the mid-Victorian period money wages were rather more flexible than they are now, so, with the development of capitalism and the growth of a large class of urban workers (or what Marxists call the reserve army of labour, the body of unemployed and under-employed in capitalist society), had nominal wages become more flexible than in Malthus’ day?

At any rate, by the 1880s and 1890s we can see strong evidence that money wages, even if they had become more flexible by the 1860s, had attained a strong degree of inflexibility downwards, as discussed in these posts:
“Nominal Wage Rigidity in the US and the UK 1865/1880–1913,” December 16, 2014.

“UK Average Money Earnings 1880–1913,” December 14, 2014.

“British Money Wages in the 1873–1896 Deflation,” December 10, 2014.
BIBLIOGRAPHY
Malthus, Thomas Robert. 1798. An Essay on the Principle of Population. J. Johnson, London.
https://archive.org/details/essayonprincipl00malt

Malthus, Thomas Robert. 1803. An Essay on the Principle of Population. J. Johnson, London.
https://archive.org/details/principleessayon00maltrich