129 Comments
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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Sean, are you also subject to "pension jail"? This is a phenomenon among public employees who are unhappy with their jobs but stick around for fear of losing unvested retirement.

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To be honest I don't even know, because it's moot.

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It would be good information to know. Does your university have an onsite benefits or pension coordinator?

Losing unvested retirement is like giving your university some of your salary back on your way out the door. It's severance in reverse.

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The one thing I know is that we are fully vested after 5 years. But our pensions are not good until after age 62 at least.

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Not quite powerless, it depends on the willingness to go on strike and the impact of that. A faculty strike at a university is devastating for the institution and its students, so after 40 years our union finally learned the value of a strike threat.

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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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Nov 5, 2022·edited Nov 5, 2022

A point a tried to make earlier is that there is a huge asymmetry in bargaining position in a period of elevated (from historical norms) inflation between larger employers and individual workers. A large company can hedge many of inflationary impacts to reduce long term volatility. It has people on staff to estimate cost/benefit analysis of risk reducing practices and implementing them. As an individual out of work you are losing 8%/month, over a year, in lost wages. Two months, 16%, is in the range most businesses can hedge for in our economy. Three months out of work and you have lost.

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There is power asymmetry and part of that is information asymmetry. The employer knows everyone's salary, but the worker only knows for sure their own salary.

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Don't forget locked in low interest rates. To sell your house now you would get less, and pay more per month in a new home.

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I totally agree with Jasper and David G.

We know now that the economic spoils of globalization have been so unequally distributed that, even though the size of the overall pie grew as a result of globalization, the slices allotted to lower- and middle-class workers ended up being smaller than they were before. There’s many plausible reasons for this outcome, but an explanation to which I’m partial is that economists and policymakers significantly underestimated the role of frictions and old-fashioned resistance to change.

“If your job gets shipped overseas, you’ll just be retrained and put to another, better use” turned out not be as frictionless as they made it sound. And I think a similar dynamic is playing out in the face of inflation. Even before considering the impact on job security, potentially uprooting your family to work for another company, or in another industry, in pursuit of higher wages is a process with its own economic and psychological costs. I think these frictions are part of explaining why we see upward nominal wage rigidity and rising inequality.

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To some degree there's a "game" people play within a company. If enough people leave for competitors, stayers can extract concessions without taking the leap, just threatening to leave. But enough people have to follow through to cause actual pain for administration.

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I switched three times in my career, each time for more pay. But it's not frictionless. Each firm had a different culture, and culture, as much as pay, pays into job satisfaction.

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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 generally a lot easier to find higher wages by switching jobs than by negotiating at your current job. But it's a lot easier to stay in your job than it is to switch jobs, especially for blue collar work. So a lot of people stay put and blame Brandon instead.

Unions good, anyone?

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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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AND...

Because big corporations are debt-saturated, the regulatory environment stifles small/medium business (biggest job creators), and the system overall is stultifying and slanted towards crony-capitalists.

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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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Is this another way of saying monopsony power? That was my first thought to what cause real upward price rigidity. Is there any evidence there?

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He seems to be saying greater monopsonistic power combined with the *exact opposite* on the labor side (because of much lower union penetration). Perfect storm. And it's probably a factor.

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Nov 6, 2022·edited Nov 6, 2022

Since many are already citing the obvious power imbalance between employers & workers, I'd like to amplify DougAz's point that labor "disorganization" is a "damper". Let me rephrase, though. It's also widely said that higher prices hit everyone. So, DougAz's flip side of that is simply that not only is there a wage raise ceiling at inflation (COLA), or below it, not everyone gets the maximum. Most raises are strictly below the inflated C-O-L. Many workers don't get a raise at all.

Overall, I can't see the surprise that the average wage increase can't keep up with inflation. One is universal, the other is partial. One is widely bounded by the other. That other is controlled only by a fall in demand. Demand for basics, eg, is rock solid. (See: "windfall profit".)

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That's a great way to say it.

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I think wage increases have declined partially because workers feel less secure. They prioritize their current jobs and wages because they fear a coming recession (this also factors into their inflation expectations because inflation drops during recessions). Since workers feel less secure, they are quitting less; the primary bargaining tool most modern workers have to negotiate a wage increase is quitting. Since fewer workers are quitting: their not negotiating as much of a wage increase, which also puts downward pressure on overall wages.

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But quit rates are actually at cyclical highs.

https://fred.stlouisfed.org/graph/?g=VJpj

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do we know why people quit? businesses closing? also just because people quit doesn't mean they get a higher paying job. plus it's possible there's a lot of churn in low-paying sectors, but the bulk of the income ("middle class"?) stays put because of kids, debt, etc. so their real income falls.

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I don’t have an answer - Noah is smarter than I am and he seems to think it’s a riddle too.

What I do know is the quit rate is high and people who quit see larger income raises at their next job: https://news.bloomberglaw.com/daily-labor-report/wage-gains-for-us-job-switchers-hit-record-high-over-stayers

Unemployment is low and somehow real wages aren’t rising. It’s weird.

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still, it seems all these aggregates hide the real story, somehow. I agree it's not obvious from these two graphs (high number of quittings and gap of switchers vs stayers). one explanation could be that given the rate of inflation we should se *a lot more* quittings, but don't. so even though it's high, it's not high enough. (as evidenced by the gap graph) therefore labor share of profits goes down.

there are a few other/similar comments that aim to provide an ad-hoc model to explain what could go on. I liked this https://noahpinion.substack.com/p/why-arent-wages-rising-in-a-tight/comment/10259989

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Yeah that was a good comment. You’d think though that with commodity prices dropping, the Fed raising rates and real wages declining, we’ll see a drop in inflation (which would solve the real wage problem). But that hasn’t happened yet either. I wonder if NS is right and we might need 8% funds rate.

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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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People are also discounting the benefits aspect. Because many Americans get their benefits through their jobs, that creates another source of power imbalance between workers and bosses.

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Yes- labor always get screwed. Inflation environment, whether due to supply or labor constraints, is swiftly countered by companies with price hikes. Labor has limited recourse, especially without unions. We shall see what the pilot’s union extracts from corporate… Engineering this soft landed will be vary tough…

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"Impeding election" is not wrong. :)

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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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Anecdotally: I have been told Unions are corrupt. So, people would rather have the company who's only goal is profit rather than a union whos goal is for the worker.

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I should like this 10 times. People should investigate why unions are not more active now. I don’t think it would take much to find out the answer.  One of the reasons is propaganda by the rentier class but there are others. 

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I think there is an unfortunate lag between how poorly Unions were as advocates in the 80s and their missing value today.

In the 1980s, Unions like UAW, IEW led big contract negotiations with the Big Corps.

But they were totally played, short sighted and lost the long game.

The long game was a construct led by Welch at GE (I was there) in the 80s, and reinforced by Reagan and the introduction of the 401k.

Labor wanted short and medium term job protection and security. But GE didn't care anything about that deal point.

Guese what GE wanted? The wanted to unburden their long term Healthcare costs, and Pension liability.

So. They began using more insurance and having employees pay an amount per month. And the 401k was the look right fake left way with all the hype, that it was better than a defined pension plan. It isn't.

Anyway, Unions played short and lost long

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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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Housing prices are currently deflating owing to high interest rates shaking out mortgage holders. Real estate market watchers don't think it will be like the nightmare of the late '00s-early '10s.

Housing has more zero-sum transactions, so more winners on one side and losers on another. In a down market, people and organizations dependent upon growth (construction, mortgage bankers, real estate agents, landlords) lose. Buyers and renters win, though. It affords renters who aspire to own property to buy, and it takes pressure off the rent market so tenants could get a break on rent increases or find a larger rental or move to a more desirable neighborhood.

In like what we were accustomed to in the '90s-early '00s and the Obama and Trump presidencies, prosperity for the real estate sector is a great pain for buyers and renters. The widespread homelessness we are seeing everywhere, and more acutely on the West Coast, are in a significant part due to rapidly appreciating housing prices even when an abundance of homes and apartments are on the market.

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does rent data match this theory? rent growth has slowed, but that doesn't automatically mean renters benefited at all ( https://www.zumper.com/blog/rental-price-data/ )

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From the perspective of a renter, growth means that if the rent is too damn high, it'll still be too damn high.

From the landlord's POV, they have to set their rent expectations lower. That could mean difficulty servicing debt or postponing or outright canceling projects under construction.

Vacancy rate of the region is something to watch. The optimal vacancy rate is between 5%-8%. At 4% or lower, rents are going to be extremely expensive. Between 8%-9%, vacancies are considered high because it might be the region is economically distressed. Double-digit vacancy rates are what you'll find in depopulating areas.

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100%

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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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I gave all my staff raises last year, but they didn’t have to negotiate.

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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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Big companies in industries collude, and HR people at different companies talk, using these salary surveys as one instrument.

Every firm I have worked at says they want to be at median in salary and top quartile for total comp based upon these industry surveys. Only an HR person could think this is arithmetically sound- like Lake Wobegon, where every child is above average.

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Further evidence of information asymmetry thus power asymmetry

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Tech by and large does not do significant in-place raises, that’s what everyone job hops.

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founding

For the last decade tech has counted on rising stock prices to give their employees raises. Now that is not in place, it will be interesting to see if employees push back.

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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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Most workers are easily replaceable, and know it. They have no bargaining power

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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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Hell yeah there are more elites than Noah. Anyone who makes more money than Noah, anyone who employs more people than Noah, anyone who holds elected office or wears a judicial robe.

Before Trump descended the golden escalator and our collective brains turned to worms, elite used to have a defined meaning everyone understood. Elite meant how small of a group could command a large base of power. The base being money, favors, and obedience from followers.

Populists conflated elitism with envy.

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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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Debtors profit from inflation, not lenders (who are capital holders).

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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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