Sticky wages in America

The recession caused a large rise in unemployment in many countries. In the USA the rise has been particularly steep, where unemployment now stands at 14.5 million, or 9.8% of the labour force. Unemployment has continued to rise despite renewed growth in the US economy, where the latest annual real GDP growth is 2.6% (measured in Q3 2010). The rise in unemployment has been blamed on ‘sticky wages’ – i.e. the reluctance of wage rates to fall.

But are wages genuinely sticky as far as the average worker is concerned? They may be in many specific jobs with specific employers, but many workers made redundant then find work in different jobs at lower rates of pay. For them, their wage has fallen, even if particular jobs are paying the same as before.

So what are the consequences of this? Does the willingness of workers to accept lower paid jobs mean that the labour market is flexible and that people will thus price themselves into work? If so, why is employment still rising? Or does a reduction in real wages for many people dampen spending and hence aggregate demand, thereby reducing the demand for labour? If so, why is GDP rising?

The following articles look at the apparent stickiness of wages and the implications for the labour market and the macroeconomy.

Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages Wall Street Journal, Sudeep Reddy (11/1/11)
The Causes of Unemployment Seeking Alpha, Brad DeLong (13/1/11)
Sticky, sticky wages The Economist blogs: Free Exchange, R.A. (11/1/11)
The Causes of Unemployment New York Times blogs: Wonkish, Paul Krugman (16/1/11)
America’s union-bashing backlash Guardian, Paul Harris (5/1/11)

Federal Reserve Economic Data: FRED Federal Reserve Bank of St. Louis (US macroeconomic datasets)
United States GDP Growth Rate Trading Economics
US unemployment statistics Bureau of Labor Statistics


  1. Why might nominal wages be sticky downwards in specific jobs in specific companies?
  2. Why might nominal average wages in the economy not be sticky downwards?
  3. Why is unemployment rising in the USA?
  4. Why might there be a problem of hysteresis in the USA that provides an explanation of the reluctance of unemployment to fall?
  5. Why might a fall in wages end up being contractionary?
  6. What lessons can be learned from the Great Depression about cures for unemployment?
  7. How might unemployment be brought down in the USA?
  8. Why may making wages somewhat more flexible, as opposed to perfectly flexible, not be a good thing?