What Should Wages Be? Does the Question Make Sense?

I’m liking the NYT’s new “Upshot” section, which aims to provide a more quantitative and data-informed take on the news (including political scientist Lynn Vavreck!).  There’s an interesting piece from today that could, I think, use a little more detail.  It concerns the decline of truckers – and trucker salaries at the same time.  Trucking companies are having trouble hiring enough talent to meet demand.  The explanation Neil Irwin offers is simply that wages are too low, and that managers are resistant to higher wages that would allow them to adequately expand.  Irwin offers an explanation that is frequently heard, but that doesn’t make much sense – that employers simply refuse to offer a market-clearing price.  Not to beat up on Irwin, because it’s a common argument, but it doesn’t seem to make much sense.

The idea that wages in a free market are “too low” doesn’t seem to hold up to more than casual scrutiny.  Keynesians often refer to “nominal wage rigidity”, wherein managers are unwilling to cut wages in recessions.  It does seem to be real, but this specifically is downwards nominal wage rigidity and is a function of existing contracts with workers.  What Irwin’s argument (and others like it) posit is widespread upwards wage rigidity, wherein employers have a firm anchor to the prices they’re willing to offer new workers.  The anchor comes from…well, it’s not clear where the anchor comes from in this account.  Wage caps can come from heavy regulations or from cartels, but neither applies in this situation.  There are many small trucking firms, and if talent is systematically underpriced they would leap in and seize the opportunity and the supposed wage gap would go away.  Irwin’s explanation implicitly relies on the (appealing) intuition that we know what the market-clearing wage ought to be, but in fact we know no such thing.

If explaining a phenomenon requires us to completely discard all of our Econ 101 assumptions…the explanation is more likely wrong than our assumptions.

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One response to “What Should Wages Be? Does the Question Make Sense?”

  1. billlabrie says :

    I sense there is so much uncertainty that no manager wants to be the guy who impacted the bottom line at all. Middle-managers are vulnerable wage slaves themselves. This human element must be remembered somehow, even if it can’t be quantified.

    There’s also the phenomenon of wage-setting by outside bureaus who rely on comparisons to similar jobs at similar employers. At the trucker end of the market, WalMart (our largest and probably cheapest private employer) is likely exercising a tidal influence in restraining wages.

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