See
Never reason from a wage change by Scott Sumner of EconLog.
"Bryan Caplan
has a post showing that Janet Yellen is one of the sensible Keynesians,
who understands the problems caused by sticky wages. Here's the Washington Post discussing Yellen's views:
The stagnation in wages despite a pickup in hiring over the
past few years has been one of the recovery's most perplexing puzzles.
But maybe the real problem isn't lack of growth. It's that wages didn't
fall enough during the recession.
That idea was floated by none other than Federal Reserve Chair Janet
Yellen during a speech on the labor market last month during an elite
central banking conference in Jackson Hole, Wyo. She used a much fancier
term -- "pent-up wage deflation" -- but it essentially means that
employers are keeping workers' pay flat now to make up for not cutting
it during the downturn.
I love that first sentence---it's like noting that prison populations
have risen "despite" a fall in crime rates. Why not the reverse? How
about: "There's been a pickup in hiring in recent years because wages
have stagnated."
In microeconomics, 99% of "reasoning from a price change" fallacies
involve assuming a supply shift, when in fact the demand curve has
shifted. For instance, saying "Oddly, global consumption of oil rose in
2007 despite a large increase in oil prices." In macroeconomics the
usual mistake is exactly the opposite, assuming all changes are driven
by shifts in demand. For instance, saying "Oddly, inflation stayed low
in the late 1990s despite a booming economy.
Oddly, very few people understand that the supply and demand model
allows for either curve to shift. Real wages are not reliably
procyclical or countercyclical. They are acyclical. Both supply and
demand for labor shifts are important."
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