The Review of Economics and Statistics Vol. 42 No. 2 1960
The Illusion of Wage Rigidity: Long and Short Cycles in Wages and Labor
Abstract
T HE main proposition of this paper is that the tremendous long-run upward tide of wages has created an illusion of rigidity by drowning out wage variations that are not only wider than most related phenomena, but are also sensitive to short and long cycles in the general economy. Almost three-fourths of that wage trend has been justified by productivity advances. Slightly over one-fourth of it has been associated with price inflation and is therefore open to the suspicion that the wage trend may have been the prime mover in a wage-price spiral and an integral part of the problem of wage rigidity. Any attempt to convict wages of such responsibility, however, must explain why year-to-year percentage changes in wages rarely led the expansion of business, prices, employment, and productivity and why those in unit labor costs have normally lagged such expansions. Few notions about wages are more widely and firmly held than the belief in their comparative unresponsiveness to economic downturns. The literature abounds with statements like the following: Moderate changes in employment are not associated with very great changes in money wages.' Money-wage levels, like individual wage-rates, are rather insensitive to cyclical forces and decline only in response to major depressions.2 Changes in British and American factory wages during I9 I9-39 lagged behind business activity by substantial numbers of months, and their fluctuations were smaller in amplitude than those of production, employment, and wholesale prices of raw and semi-finished goods.3 The level of wages in prewar Britain was fairly constant in the face of wide employment fluctuations.4 German wage rates have failed to show genuine cycles and have reacted only to major depressions and then with a lag.5 Little decline in Swedish wages could be found in depressions between I887 and I930.6 When there is a considerable increase in unemployment . . . do wages drop as they would in a competitive market? History answers, No.7 There has been no lack of explanation for this apparent wage rigidity in contractions. The most usual has been union resistance, but other explanations have included statutory wage minimums; insistence of the unorganized worker on maintaining his living standards; 8 reluctance of employers to invite popular disapproval, provoke unionization, or risk loss of valuable employees; 9 time required to ascertain that a recession is on; and finally the bureaucratic wage policies of big firms and unions, which can be altered only at substantial cost and difficulty.10 Opinion has been less unanimous concerning wage behavior in expansion. Some believe that wages initiate and aggravate inflation-at least under the recent drive of mass unionism.11 But
- DOI
- 10.2307/1926533
- Volume
- 42
- Issue
- 2
- Pages
- 140
- Sources
- openalex crossref