Sticky Wages and Long-Term Unemployment

by: Econophile

There was an interesting article in the Wall Street Journal Tuesday by Sudeep Reddy on long-term unemployment that I thought did a good job of painting a picture of what happens during the bust phase of a business cycle.

The article, "Downturn's Ugly Trademark: Steep, Lasting Drop in Wages", deals with the problem of long-term structural unemployment, something I discussed in last week's article, "What The Job Reports Mean." My point was that there is insufficient "real" capital available for new growth, and thus unemployment is likely to remain high.

The stories related in the article about folks trying to find employment are both dismaying and, for some who found jobs, inspiring. In a sad note, "Research shows that children of workers who lose jobs and go back to work at lower wages appear to suffer from lower wages, too."

Here are several excerpts from the Journal article:

But the decline in their fortunes points to a signature outcome of the long downturn in the labor market. Even at times of high unemployment in the past, wages have been very slow to fall; economists describe them as "sticky." To an extent rarely seen in recessions since the Great Depression, wages for a swath of the labor force this time have taken a sharp and swift fall. ...

The only other downturn since the Depression to see similarly large wage cuts was the 1981-82 recession. But the latest downturn is already eclipsing that one. Unemployment has stood above 9% for 20 straight months—longer than the early 1980s stretch—and is likely to remain above that level for most of 2011, putting downward pressure on wages. ...

Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.

More than eight million Americans lost their jobs during the recent recession. Many are returning to the workforce--but in jobs that pay them far less than they used to earn. WSJ's Jason Bellini reports.

The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. "The deeper the recession, the lower the wage you're going to get in the next job and the lower the quality of your next job," he says.

While difficult for individual workers, lower wages can make U.S. industries and companies overall more competitive and allow employers to hire more workers than they would otherwise. In the long run, that may make the nation more prosperous.

The article mirrors a lot of the same things I discussed. But what I found interesting is the comment on "sticky wages." This is contra to Keynesian thought in the sense that one rationale for government fiscal stimulus is that because wages take so long to decline, resulting in high unemployment, the government needs to step in and assist the unemployed and spend to get the economy going again. On the other hand, if wages declined quickly to realistic market wages, more employers would be likely to hire again at lower wages and thus fiscal stimulus would not be necessary.

Another reason for long-term unemployment was discussed in the article and that is that the unemployed may lack the skills that employers need as the economy emerges in perhaps new directions. Certainly many in industries related to the housing market and housing finance are finding this so. This is the unfortunate consequence of Fed induced boom-bust cycles.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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