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Some of you may be familiar with the idea in macroeconomics that since prices (particularly wages) are “sticky” that recessions can turn into depressions or last a long time because the inability of prices and wages to fall when “aggregate demand” falls will prevent markets from equilibrating. There is lots to read on this topic, but I wanted to offer up one observation about why this might be less of a concern today than it was perhaps 70 years ago during the reign of Fisher and Keynes.

The reason folks think wages are sticky “downward” is that employees react negatively to pay cuts. But we may need pay cuts to keep businesses profitable when their sales go down. Incredibly people behave as if they’d rather have a greater chance of losing their job than having to work for less pay. Now there are all sorts of reasons for this which we need no go into. Perhaps when wages comprise 100% of compensation this makes sense (though I still have issues with it – especially since this cannot be true for people who are not yet working), but what is noticeably different about today’s labor market is that a considerable portion of our compensation comes in the form of non-wage benefits. I’d estimate that the average worker obtains about a quarter of his/her compensation from the value of paid vacation, health benefits, and the like.

And I think the existence of such non-wage benefits makes compensation much more flexible downward than wages alone. Wages are transparent, easy to see and easy to feel. Non-wage compensation is absolutely not. In fact, ask anyone you know what the value of their non-wage benefits are and I am positive they cannot tell you. For example, the U of R contributes a whopping $12,000 per year on my behalf to the health insurance provider that we have. $12,000. That does not show up on my paycheck. I only “see” the contributions that I make to the premiums above and beyond that, plus my contributions to my HSA. In fact, the recent dustup I mentioned on Monday is very likely to be about this sort of a thing. The employer therefore has many more ways to reduce worker compensation when they are paying compensation in the form of wages plus non-wage benefits. In some cases it might not even be clear to the workers that their compensation is being cut. Maybe small elements of the health plan are eliminated (free consultations on diets for example) or maybe the share of premiums paid by employers can fall – but so long as people see their cash wages increase by an “acceptable” amount they may not be very conscious of the fact that their overall compensation is flat or falling.

How do I know this to be likely? Because over the past 30 years we have seen the contributions/payments employers make toward “our” health insurance skyrocket and yet we hear regularly that “pay” has not increased. Now, you may not like the fact that wages are flat while non-wage compensation is on the rise, but it is no doubt a fact that your compensation has increased. So if we do not notice it when nonwage benefits are increasing, I argue that it is likely that employees are not going to be as aware of it when nonwage compensation decreases.

Much has been written in the blogosphere to cast doubt on the sticky wage theory, at least as it applies to this recession (e.g. can they really be sticky for 4 years, is aggregate “demand” still lagging after 4 years, etc.), but this surely must have something to do with it too.

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