Nov 5, 2022Liked by Noah Smith

Upward nominal wage rigidity is so obviously a thing, I can't believe anyone would discount it. I have unique access to this phenomenon, as a Professor (top rank) at a 3rd-class public non-research university. Faculty salaries here do not have cost-of-living adjustments. Once we have reached the top rank (I call myself a "gargoyle") we are both 100% job-locked (no other university in its right mind would hire any one of us) and subject to the results of union negotiations. Our paychecks might be the same for years on end, unless the union can negotiate an increase here and there. The union can point to inflation and beg and plead, but the idea that they could ever win a 10% increase in a single year is laughable. 3% per year for 3 years is considered a huge win.

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Nov 5, 2022Liked by Noah Smith

Interesting piece. And although I agree with Noah that it seems highly likely there's probably something deeper at work (that economists need to research), I was intrigued by this sentence:

>>Another possible reason is that everyone keeps expecting inflation to be transitory.<<

The above rings credible to my ears, although I might be tempted to replace "expecting" with "hoping." It's a royal P.I.A. to switch jobs. In some cases doing so means moving to a different city. Perhaps a super expensive one. In many cases (yes, even in this age of remote work) it entails screwing up your commute. And who wants to move when you've got a good deal on rent or your kids are happy in school? There's also spousal income to consider, which has been linked to a general decline in employment-related geographic mobility.

Plus, there's this: for most workers I'd imagine that "amount of time with an employer" correlates positively (almost by definition) with job security. The employee who has been working for a given employer for (say) nine years is understandably going to be nervous about making a move to a job where the long term prospects for stability are questionable. This is all the more true given the fact that, in the US at least, it wasn't all that long ago that underemployment was a persistent, nagging problem (and indeed we had a scary episode of *mass* unemployment only 2.5 years ago!). So a lot of workers have vivid memories of a recent, weaker job market, and thus they're understandably hoping for the best in terms of their own wages rather than getting into a situation characterized by less job security that increases the risk of joblessness.

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I always figured this was because the upward pressure on wages are really slow, indirect mechanisms. So, higher wage jobs are on offer, but people dont like to switch jobs, it's a big hassle and takes a long time.

Compare to raising the price of butter: walk out and change the tag to a different price.

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It's amusing that the causes for upward wage rigidity remain a mystery to economists. Anyone who has worked in corporate America understands the phenomenon quite well.

Companies will claim with a straight face that 3% is a good annual bump... regardless of macroeconomic factors. HR everywhere will pish back on giving "big raises" in a rough economy, even though what they are advocating for is cutting real wages in a labor shortage.

And the fact that the solution to this - change jobs - Economists seem to forget that once you get above hourly jobs and into professional and management employees job switching is far from frictionless. Finding a compatible opening (if there is one right now) can take months. Searching and interviewing take time. You may have a non-compete or NDA that makes it harder, or just vesting long-term benefits that you don't want to lose. You'll go into a new role on a 90 day "we can just fire you" onboarding period, with a company that may be WORSE than the one you left.

All of which means that "negotiating" higher wages is impaired by switching costs (time/effort), limited by contracts and other restrictions, is slow to occur due to search and interview time... and it means HR is kinda right. They can cut real wages this way and even those who leave will take a while to do so.

Even worse, there doesn't need to be formal collusion for employers to resist raising wages and claim "nobody wants to work" for months. Same way gas prices are always slow to respond to drops in oil prices but go up lightning fast.

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Nov 5, 2022Liked by Noah Smith

I'm a business guy..45 yrs. Sloan macro micro 73 75(no mba).. I've set price on a hundred products in a half dozen markets. My technical background is in polymer physics or rheology. Springs- elastic; dashpots - dampen (shocks)

Hypothesis: Comapared to the 70s, there is weak linear elastic response to price in the supply-demand equation. The time constant and dampening retard market signal responses.

What might have taken days and weeks...for price changes to supply/demand takes months.

Why. Because the class of the # of direct competitors with direct fungible products is severely reduced.

Large size of large owners are an intrinsic retardation of price response.

In labor, the buyers are fewer (employers) while as usual, labor is broadly disorganized. This disorganization is another damper. The two systems... employers large and willing to be slow on labor price have one response function and it's not in phase or sync with labors.

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I appreciate that Noah tries to back up all his economic claims with research evidence, but on the topic of upward wage rigidity (or the lack thereof), the research evidence he presents is flimsy and I wonder if there's better stuff out there, even from the social sciences as opposed to pure economics.

As someone who has worked in industry, it's completely obvious that people tend to shy away from aggressive salary negotiations with their boss for a host of reasons. Bringing up "inflation" in a salary negotiation is largely a non-starter. Bosses present pay raises of X% as "generous" based on social and industry conventions independently of macroeconomic factors. Might as well bring up the war in Ukraine as a reason to raise my salary, it will sound no less ridiculous.

Perhaps, as Noah alludes to, X will rise over time if inflation is sticky, but it definitely has not risen much yet, and I don't think it's because workers underestimate inflation. I think workers estimate future inflation approximately correctly, but managers pretend they don't or use existing social conventions (X%) to suppress higher wage demands. Social conventions take a lot longer to adapt than 9 months (the approximate period since inflation started).

I also think that even in today's labor market, despite it being relatively tight, companies largely still have greater bargaining power than workers. I think this may also have to do with social conventions or the expectation that the good times in the labor market won't last, so better stay on your boss's good side.

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This is a very good, and given the atmospherics and the impeding election, a very cogent discussion. Speaking totally as a non-economically oriented, ordinary dude I see no mystery why there is upward nominal wage rigidity. It exists because we have had decades of (1) expansion of corporate and business power (through mergers and consolidations, as well as declining federal regulation and increasing support for business in court decisions) and (2) decimation of the power and cultural heft of labor by the general atrophy of unions.

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I’m surprised unions are not mentioned - they are a factor for collective bargaining against greedy bosses and shareholders? Why aren’t they more active now? Why not more strikes?

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High inflation this time around is accompanied by a bear market in most asset classes and whispers of a pending housing crash. So even though inflation is high, it’s like a recession in some ways with workers are both more afraid for their jobs and management has an excuse at the ready, especially if you are in tech and finance. Lower paying jobs has the highest wage growth, which makes sense in this context as they have the lowest exposure to asset prices.

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Regarding upward wage rigidity. Can anyone here really negotiate their salary from year to year, or do you just accept what is offered? And if you say you negotiate every year, I don’t believe you.

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As a tech worker who probably has higher than average bargaining power, increasing salary to counter inflation was smacked down by execs when people asked. When I took this job in January, I had 2 other offers, one paying significantly more. Even so, I got absolutely nothing to account for inflation when they adjusted salaries this year. Salaries are set on based on industry benchmarks, which are probably not updated that often. I'm guessing it would take a couple of years at least for some companies giving raises to counter inflation before they start affecting the benchmarks. Take that anecdote for what you will.

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There's significant friction cost in asking for a raise equal to elevated inflation. Confrontation avoidance, changing jobs if you're not satisfied with the raise you are given, etc.

Inertia is powerful.

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Here is the problem: something that was 4 bucks last week is 5.30 this week, at the beginning of the year it was below 3. Companies refuse to give raises, they refuse to do cost of living adjustment, we are just told you have to do more with less while getting more responsibility and work thrust on us. Meanwhile, the company is bringing in massive profits, the manager seems like he is going on vacation every month, and prices are sky rocketing.

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As a basic physical scientist in my career I find many of the adoptions of perturbed equilibrium models in Economics as non-robust. In a period of an increasing inflation rate for consumer goods two asymmetries shift what is a true zero sum economic situation to the side with more knowledge, flexibility, and depth. A large company has staff to estimate and hedge its financials, trading potential upside for relative stability; losing 20% is SOP, losing >50% better avoided. But an individual worker has a very different calculation, and that varies along the income/task scale: Favoring "elite" individuals and disfavoring more interchangeable workers.

Is there any more "elite" than Noah? A physics BS from Stanford, a PhD with Miles Kimball at U.Mich (now at University of Colorado), writing for Bloomberg, giving up an academic track appointment (with an uncertain future) to become a pure pundit. The pundit output is wide ranging in topics but tight focussed in analysis.

Substack is interesting in that my expectation is that subscriptions are dominated by "elites". Pure information streams (not overwhelmed by ads) cost money. Substack mostly makes those streams reasonably priced. I can subscribe for $5/mo to many worthwhile streams, and a bit more for special ones. So far it seems a very efficient way to get high level content, add free, distracting link free, in reasonable supply. I look forward to the evolution of Substack.

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"If upward real wage rigidity exists, it changes how we should think about inflation. It would mean that inflation consistently takes income away from workers and hands it to capital owners. "

Is that not what is happening? Corporate profits seem to be on a hockey stick ride (https://fred.stlouisfed.org/series/A053RC1Q027SBEA ).

If true why would you attack inflation on the labor side and not the profit side?

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Nov 5, 2022·edited Nov 5, 2022

One thing I notice about your discussion is that you don't differentiate much between new hires and existing hires. I often read /r/cscareerquestions, a subreddit for software developers working in the tech industry. On the subreddit, it's *very* common to observe that you can get a *huge* salary boost by job hopping. I think this is due to two factors:

* Rapid wage growth in the tech industry (not so true recently though).

* Rapid human capital development. A software developer with 1-2 years of experience is *much* more valuable as an employee than a fresh college graduate. (There is a glut of fresh CS grads and a shortage of people with 1-2 years of professional experience; seems like an interesting market failure but out of scope for this comment.)

People on the subreddit often speculate about what's going on and why this is happening. Shouldn't a rational boss be willing to raise wages for their existing employees in order to discourage job hopping? The cost of software developers switching between jobs is high from the perspective of employers, since it generally takes a few months for a new software developer to really get up to speed on a new codebase. There are many stories of software shops where junior devs are getting hired for more than established senior devs are making. And the industry has a level of job hopping that is practically comical.

The two best explanations I've seen for the phenomenon are:

* Conservatism on the part of employees. For many developers, once they get into the groove of working at a particular company, they like having that stability in their life and they don't want to disturb it, even if it means forgoing the possibility of tens of thousands of dollars in additional income. People in the subreddit often talk about less careerist, conservative coworkers who grumble a bit about lack of wage growth but don't do anything about it.

* Recalcitrance on the part of the boss. There are also lots of stories in /r/cscareerquestions of developers who come to the boss and ask for a raise, the boss doesn't give them one, then the dev quits and the boss ends up being upset. My guess would be that the boss thought the employee was bluffing and the employee is actually too conservative to seriously look for another job (see previous bullet point about grumblers who don't do anything).

I think the employee conservatism effect would apply much more strongly to most non-software development industries. Software developers are well compensated and tend to have low student debt burdens and, often, cheap lifestyles. And they know their skills are in demand. This facilitates a lot of job hopping. It's pretty common to search for a new dev job just because you're getting bored.

But consider someone who's living paycheck to paycheck, either because of low wages, high student debt, or an expensive lifestyle. Suppose they're thinking about searching for a new job. This would involve re-allocating time and energy away from their day job into that job search, and also taking a few days of vacation so they can go in for interviews. Supposing in combination that creates a 5% chance of them being fired (e.g. because a recession happens to be right around the corner, and the company will want to cut underperformers in the event of a recession). Suppose they have a 50% chance of finding a new job with a 20% raise. In *dollar* terms, a 10% expected salary gain is better than a 5% expected salary loss. But due to diminishing marginal utility for money (living paycheck to paycheck), searching for a new job could easily look bad in expected *utility* terms. No one wants to risk homelessness.

The employer knows this -- the employee can't credibly threaten to search for a new job. So the employer doesn't raise wages.

I think this hurts working class people a lot, and it's part of the reason why libertarian arguments like "if you don't like your job, just vote with your feet and find a new one" don't resonate with them. It could also explain why minimum wage laws don't do as much harm as you might expect them to do, based on a no-diminishing-marginal-utility-for-$ model. (Employers are underpaying relative to that model; minimum wage increases force them to pay more and actually push us more into line with that model.)

Anyway, it seems like maybe someone could fix this problem by starting a "job search insurance" company that basically helps underpaid people search for a better job. If you get one they take a cut of your salary increase; if you get fired due to your job search, they help you bridge to your next job. Could help a *lot* of people who are stuck in shitty jobs and don't have leverage with their boss. And also be a very profitable endeavor. Libertarianism to the rescue ;-)

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