Saturday, April 27, 2013

Think the Laws of Supply and Demand don't matter?

Think again, as this paper from Mary C. Daly and Bart Hobijn of the San Francisco Fed makes obvious;
...three things stand out. First, the fraction of workers with no wage change increased substantially in 2011 relative to 2006.  In 2006 about 12 percent of workers reported zero wage change; in 2011 the share had risen to about 16 percent. This 16 percent is the highest level of the spike at zero for all the 32 years for which we have CPS data. 
Second, the fraction of workers getting a wage increase declined noticeably over the period and the size of wage increases, conditional on getting one, was  substantially lower in 2011 than in 2006.  Thus,  there is notable compression of wage gains near zero, suggesting that the inability to adjust nominal wages downward may influence the magnitude of wage increases.  This is a point made by Elsby (2009). 
Finally and surprisingly, there is little difference in the fraction of workers that get wage cuts between 2006 and 2011.
[Bold in the above courtesy HSIB]

What all that means is that when wages aren't free to fluctuate in response to changes in the demand for labor, surplus (of workers without jobs) and shortage (of  job opportunities) will result.  Pretty much as Adam Smith drew it up 237 years ago.

Now, why isn't that a bigger factor in political discourse during this latest period of economic travail?  Is it that powerful people don't want to hear the old wisdom, because they might find themselves in the embarrassing position of having to explain why they passed laws that ended up increasing such wage rigidities?

Things like collective bargaining, minimum wages, 99 weeks of unemployment compensation, occupational licensing....

[Thanks to Scott Sumner]

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