Bryan Caplan and others have been trying to explain why wages aren’t falling, in spite of high unemployment. I applaud their efforts, since this is an important task to avoid a Keynesian solution.
However, I haven’t found these theories too convincing. (Here are my own musings on “sticky wages.”) For example, I’m pretty sure Bryan was dabbling in the idea that employers would hurt morale if they cut everybody’s wages 10%, rather than maintaining wages and letting people go. (I don’t have the link, and maybe I’m wrong and Bryan was criticizing this theory. But I know he, and I think Alex Tabarrok, were blogging about this stuff within the last year or so.)
Yet even if this is true, it hardly is decisive. Is still raises the question: Why don’t entrepreneurs open completely new locations, staffed by formerly unemployed workers who are willing to work for 90% of what their peers are making in a sister operation?
You might say, “Why would a firm go out of its way to expand operations, in the midst of a recession?” Fine, but right now there are still places that are opening their doors every month. The frequency is obviously lower than during 2005, but it is still happening. So why aren’t these new places offering starting salaries well below the “normal” amount?
My arguments here are the standard thing libertarian economists say, when the market is accused of discrimination against women or minorities. We usually say, “Well shucks, if for some reason a bunch of racist employers are paying less than what some employees are worth, worst-case a black entrepreneur would open up shop and hire fellow blacks at a slight pay raise. Since he would be making more profit per employee than his racist rivals, he would outcompete them…”
My main point isn’t so much that libertarian economists are wrong for thinking “morale” explains sticky wages, but rather that we should be consistent across arguments. If we think these sorts of things can keep wages above the market-clearing level for years at a time, then we should be open to the possibility that these types of things can keep market wages well below their “equilibrium” level for years at a time too.