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| Source: Torsten Slok |
A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.
Or not, as the graph shows.
Now, obviously, it took 5 years, and those haven't been pleasant 5 years. A devaluationist might counter that an exchange rate could have fallen 25% overnight. But this graph hides the composition. I would guess that not all Greek wages went down by the same 25% -- that some are going down more than others, and that like all prices the dispersion is more interesting than the average. That process -- moving out of inefficient businesses (and government, where wages have also fallen) and into better ones -- is always painful and would not happen under a quick depreciation.
So, before critics go all nuts, I'm not making a case that wages are as flexible as exchange rates -- clearly not. But the common view that nominal wages may never fall, and eternally sticky wages account for years or decades of stagnation, just isn't true per the graph.
A slight complaint -- the graph title is "competitiveness," not "relative wages." There is a lot more than wages in "competitiveness," like, say, productivity. You can be "competitive" with very high wages if you have a dynamic, efficient, high-productivity economy. And "competitive" is a terrible word anyway -- it has a very mercantilist ring, which is not how trade works.
What common view holds that wages are forever sticky? That seems like a straw man.
ReplyDeleteIs anyone here aware of any country in history that had a major demand shock like greece and somehow managed to get out of the recession because of falling wages? The only case I know of is the recession of 1920/21 in the US, and it is actually not a very clear case because it happens so shortly after WW1.
ReplyDeleteWages aren't the only price. I believe LOTS of prices fell in 1920/1921 U.S.
DeleteI dont't quite get what negotiated hourly earnings are vs the index? I'm sure the trends would be the same but the different volatilities makes me suspicious
ReplyDeleteIn Germany negotiated wags have the force of law, i.e a minimum wage for each occupation in each industry in each region. Yes, there are residual labor markets in the country where this is not true. Yes, there will be different volatilities, but that would apply to a small share of all workers.
DeleteI see thanks!
DeleteWith 25 per cent unemployment, I hope wages do fall!!
ReplyDeleteYou should also note a large informal economy has now developed in Greece.
Sticky wages arguments are nonsense anyway. This is just a fixation of MIT-Chicago debates among applied mathematicians. There are plenty of historical case studies where anti-cyclical policy has worked whether prices are flexible or not (eg preWWII anti-cyclical policy worked with flexible prices almost everywhere). Keynes did not say that rigid prices are a pre-condition.
Sticky prices, like rational expectations, has been a massive distraction.
Developed? The initial reports I saw of the Greek crisis talked about rampant tax evasion. The gist of the reports was that the large informal economy is why the Greek government got in trouble in the first place.
DeleteI still want to see a review of Cochrane's paper recently delivered to the Hooverites at Stanford....would Europe be better off doing a lot of QE and bulging their bank reserves too?
ReplyDeleteAs for the Greeks, I hope they can do better. A 25 percent cut in pay is a wallop. Ouch. They have huge unemployment too. Ugly time. One cannot say austerity and tight money have worked for the Greeks. This is a success story?
The Fed did a lot of QE, and the US economy has fared better than Europe's. Is that the reason?
The data is pretty clearly funky. I suspect the creator of the graph is using US dollar denominated wages and possibly inflation indexing the US dollar prices. The point of sticky wages is that nominal prices in the domestic currency (Euros here) are sticky.
ReplyDeleteHere are the OECD average annual wages:
2008 2009 2010 2011 2012
20 973 22 120 21 048 20 542 19 807
This is a 3-4% fall per year, starting in 2009 not 2010 - maybe the quarterly start makes a difference. So 7-8 years to get a 25% fall in nominal wages. Which I think is pretty close to the "years of stagnation" claim.
Prof Cochrane,
ReplyDeleteI unfortunately have to agree with the first poster on this, I've yet to read, from any serious economist, the claim that wages are 'nominal wages may never fall' or 'eternally sticky wages'; I see where you're coming with this, you're quite rightly trying to highlight the problems of arguing that sticky wages have the sufficient explanatory power by themselves for what's happened in the last 5 years and are just doing so in a hyperbolic way... but I think, and I mean in this in the best way possible, that you could have expressed this a bit better.
John,
ReplyDeleteFrom the graph: before 2010, Greek wages were rising twice as fast as German wages.
I think that's an important part as to why Greece is in such troubles.
German wages were much more than Greek even at the higher point of bubble.Lower wages are part of competiveness solution though other things missing there will be no competiveness advantage because of lower wages.Informal economy has been raised as cost of living didn't lower and the average small business can't survive with having staff normally in payroll as the demand has collapsed.Lower wages have been > 30% in public service positions while the self employed and private sector employees face over 50% in income (adj for taxes).
ReplyDeleteOr not so competitive. Data (http://www.esee.gr/Profile.aspx in Greek) for the first 6 months of 2014 show that while tourism increased by 16.5 pct compared to last year tourist spend less during their vacation. Part of the reason is the "all inclusive" deals and part that tourists (still) find prices very expensive.
ReplyDelete