Cutting Wages Is Hard to Do: Why That's Bad for Unemployment

In Jackson Hole, Wyo., this August, Janet Yellen, chair of the Federal Reserve, gave a speech explaining just how hard it is to understand unemployment. She made passing mention of an idea only an economist could love: “downward nominal wage rigidity.” In plain English, that means it’s hard for any company to cut pay, even in a recession. Economists sometimes call this “wage stickiness.” Depending on your brand of economics, stickiness either makes no sense and therefore only happens because of bad policies, or it’s a significant, enduring problem that worsens unemployment. Yellen seems to be leaning toward “enduring problem.”

In her speech, she cited a paper by the San Francisco Fed’s Mary Daly and Bart Hobijn. They took a 20-year-old formula for measuring stickiness and ran it through the years from 1986 to 2012. Hobijn was surprised at how few pay cuts he found in the most recent recession. “The only thing that’s really shifted is that it’s surpassingly binding,” he says. Wages, he means, are even stickier than he thought.