Are Sticky Wages Still the Problem

From Tyler Cowen:

One simple view is that Keynesian economics holds true in the short run — it explains a lot of layoffs — but it doesn’t explain longer-run unemployment, precisely because wages are sticky only for a while.  That’s what most neo-Keynesian models imply and for the most part those are good (but not perfect) models.  What we’re seeing is a previously rejected form of Keynesianism, applied across increasingly long and increasingly implausible time frames — suddenly pretending to be the mainstream view.  It’s not and has not been for a long time.

In other words, Keynesianism is morphing into a theory of the long run.

He calls the sticky nominal wage theory “an embarrassment — when it comes to the unemployed across the longer run (but not the employed)” and then offers this provocative sentence:

A lot of people don’t like hypotheses which suggest the unemployed are not victims of the system, so it doesn’t get much of a hearing.


About brianbergfeld
I am an economics PhD student at Washington University in St. Louis.

One Response to Are Sticky Wages Still the Problem

  1. Adam says:

    I am provoked!

    Even though I love to hear myself talk (and read myself type), I can’t comment too much on Cowen’s statements. My gut tells me that persistent unemployment is the result of the convergence of several factors: wages, taxes, willingness to hire, skills of the workforce, etc.

    I found his point about the unwillingness of employers to undertake new projects and expand their workforces to be very compelling. I think a lot of airtime (often deservedly) goes to the disincentives of unemployment insurance, but the demoralizing effect of persistent lack of new hiring. Maybe the two together are more responsible for high unemployment than wages. Maybe I don’t know what I’m talking about.

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