I forgot to blog last week’s “current events” article on Congress and the debt ceiling.
Then today, I respond to Karl Smith’s invocation of “sticky wages” as a justification for monetary and fiscal activism. Note that this is not my response to the quasi-monetarists (though it’s applicable); this particular article has been in the queue for weeks. An excerpt:
[W]e should note that “sticky wages” are not a market failure at all, but a quite appropriate response to the worker and employer’s desire for predictability. In other words, it is not some arbitrary fluke that allows copper and gold prices to adjust by the second, while labor contracts tend to be for periods of a year or more.
Suppose things were the opposite, and that workers’ wage rates could adjust every minute according to supply and demand. Someone making $20 per hour today, might make only $8 per hour tomorrow. In such an environment, workers would build up an enormous cushion of savings, because they would have to draw down their liquid assets to get them through periods of below-average wages. Very few workers would buy houses, but would instead rent apartments, ideally on month-to-month terms.
I have no doubt that if this were the norm, interventionists of various stripes would invent sophisticated mainstream models showing that such an outcome was “Pareto inefficient.” If only the government would pass laws, requiring labor contracts to lock in wages for longer periods, then the enhanced predictability would increase the welfare of everyone in society.
Because they could count on their paychecks for a longer horizon, workers would reduce their antisocial “hoarding” of cash. Without such benevolent government intervention, the perfectly flexible wages of the cutthroat capitalist economy would be yet another example of market failure.
When I wrote the above, I intended it as a hypothetical (yet crushing) argument. But in retrospect, I think I have heard interventionists complain that “piece wages” are unfair, the government should get involved, blah blah blah. I’m not saying that they’re the same interventionists, but still, it’s ironic that whether workers get paid a fixed hourly wage for (say) a year, or whether they get paid in direct proportion to the spot market value of their output, either way it’s evidence of market failure and justifies government intervention.