Tuesday, August 16, 2011

Memo to Keynesians: Not All Wages are Sticky Downward

The main explanation Keynesians offer for unemployment when there is a drop in what they call aggregate demand is that wages are "sticky downward." That is, even though demand for labor falls, something prevents wages from falling to market clearing levels. If wages are kept above the market level, their will be a surplus of labor, or unemployment. Lower aggregate demand plus sticky wages equals mass unemployment, QED.

Manfred Honneck and the Pittsburgh Symphony Orchestra
I have already written, however,about how rigid wages are not a universal problem. Another more recent example of falling wages in the midst of recession is salary concessions by the Pittsburgh Symphony Orchestra. A few weeks ago the Orchestra musicians agreed to a not insubstantial 9.7% pay cut next year. In response to their actions, the Symphony's music director, Manfred Honneck, volunteered to take a 10% cut.

While I do not rejoice that circumstances are such that people must accept lower wages, it is good to see people willing to submit to economic reality.

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