Alex Tabarrok posted at Marginal Revolution about sticky wages. It’s an interesting bit of mathematics. I can see his point, that sticky wages for employed people can keep the labour market from adjusting. Because the unemployed are a minority of the labour force, even large reductions in the wages they are willing to accept have a small impact on the total wage bill.

My reaction to this bit

If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.

was, ‘What’s this “we” stuff?’.

Tabarrok is saying that if ‘we’ take a 5% pay cut, ‘we’ can have economic growth. What kind of economic growth entails having less? My only explanation is that Tabarrok is treating labour costs only as costs, as something to be reduced. There is no recognition that those costs are also the returns to people’s labour, and that increases in those returns are exactly what most people experience as growth.

The second problem with this idea is that it doesn’t fix the problem. The US economy is depressed because of low aggregate demand. Tabarrok’s solution is to take the same insufficient demand and spread it amongst more people. That will put more people back to work, but it doesn’t really solve the underlying problem.

This sort of analysis seems to forget that the economy exists to provide people with goods and services. It isn’t some separate entity whose growth somehow has nothing to do with the people involved.

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