The economic outlook in the United States right now is remarkably positive according to many indicators; unemployment is at its lowest since the dot-com bubble, the stock market is at record highs, and inflation is relatively mild. Wages, however, seem to be bucking the trend. Growth in nominal wage rates has remained modest despite a tight labor market, puzzling many commentators. The blame has been spread widely; China, robots, and Baby Boomers are the target of one recent article. However, the answer for this puzzling phenomenon could perhaps be found in the work of John Maynard Keynes.
One of the central tenets of Keynesian economics is the concept of ‘sticky wages;’ the belief that wages, more so than other prices, are inherently inflexible and rigid, particularly in the downward direction. This key plank of Keynes’ theory has often been used as an argument against deflation and as an impetus for monetary expansion in a recession. Although, these policy prescriptions have been dealt with countless times, what of the underlying claim?
It turns out that praxeology per se has very little to say about the existence, or non-existence, of sticky wages. Assuming that by ‘sticky’ all that is meant is that it takes a long time for wages to adjust to market pressures, the only judgment being made is a quantitative one. Mises constantly stressed throughout his work that the only judgments praxeology can make are strictly qualitative. For example, if there is a increase in the demand for labor, we know qualitatively that the wage for labor must rise, ceteris paribus. However, in the exact same sense that we cannot predict the magnitude of this increase in wage rate, we can never predict the time it will take for wages to increase.
How Markets can Encourage Sticky Wages
There are many reasons for expecting wage rates to be less flexible than other prices. Bob Murphy has gone as far as to suggest that flexible wage rates would no doubt be a “market failure.” This argument is simple; workers don’t like uncertainty, if their wage rates fluctuated as freely as the price of a barrel of oil they would be forced to bear much more uncertainty. A long-term fixed-wage contract transfers the burden of bearing uncertainty from the laborer to the entrepreneur. By virtue of their position entrepreneurs are more apt to take on this kind of risk, likewise, laborers by demonstrated preference of not being entrepreneurs clearly value reduced uncertainty. This function is no different to that served by future markets in transferring entrepreneurial risk from producers to speculators.
