A Shred of Evidence on Theories of Wage Stickiness

Abstract

A small interview survey was undertaken to see how actual wage-setters would react to central ideas of several economic theories of wage stickiness. Wage cuts were surprisingly prevalent in recent years, despite booming economy. The strongest finding was that managers believe that perceptions of fairness play a major motivational role in labor markets and that a fair wage policy is a good deal more complicated than simply not cutting wages. We also found substantial evidence for money illusion and against adverse-selection version of efficiency wage model. Why are wages sticky, especially in downward direction? Does stickiness apply to nominal, real, or relative wages? Although these questions are central to at least some macroeconomic theories, satisfactory answers have eluded economists for decades-though not for lack of theoretical effort. Almost a decade ago, Arthur Okun [1981, p. 9] opined that the Keynesian wage floor has been subjected to more Talmudic exegesis than any other passage in history of economics. In intervening years theoretical literature on wage rigidity has exploded. By now economists have more theories than they know what to do with. Empirical research is supposed to discriminate among competing theories; and econometric evidence may eventually eliminate some theories from contention. Currently, though, it seems to us that new theories are sprouting up faster than old ones are being rejected. Part of problem is that many theories of wage rigidity rely on unobservable variables and hence are difficult to reject with kinds of data that econometricians usually have. With this problem in mind, we turn in this study to an unconventional type of data, sort that economists (alone among social scientists) rarely use: we actually asked a small sample of wage-setters about nature and sources of wage rigidity in their own companies.1