How sticky are real wages anyway? The mainstream view is that real wages are almost completely acyclical. But a new paper by Basu and House challenges this, here is part of their conclusion:

…there are indications that the allocative wage — the wage that governs hours worked and that firms internalize when making production and pricing decisions — may not equal the contemporaneous remitted wage. In particular, firms and workers may well have an implicit understanding that the remitted wage will be a smoothed version of the expected allocative wage. By estimating the expected present value of wage payments, one can construct a “user cost of labor,” which should measure the underlying allocative wage.

You can think of the employer as adjusting the “career ladder” of the worker while the contemporaneous wage remains more or less constant. So in good times that “true” real wage goes up, and in bad times it goes down.

I would say the verdict on this idea remains out, but I found this a stimulating piece to read and it also offers an excellent survey of the literature.

Here’s the catch: on the internet I’ve read dozens — no, hundreds of times — that real wages haven’t gone up more because the Fed chokes off real wage hikes every time the economy nears recovery. You will notice that this claim is simply flat out wrong if the mainstream view of real wage acyclicality is correct. Somehow that never seems to come up. (Yet it seems this ability of the Fed to stifle real wage hikes feels like it is true.)

Now, the Basu and House paper, if it is correct, actually creates an avenue through which you could start (partially) viewing the Fed as a real wage villain. Maybe. If some other auxiliary hypotheses were to kick in, which is not guaranteed.

But then here is the thing: you could no longer believe in traditional doctrines of wage stickiness. And you would have to change many of your views on macroeconomics, and indeed on the efficacy of labor markets more generally.

People, repeat after me: Not all complaints can be true at the same time. I know it is hard to live with that reality, but maybe it is worth a try. And if you don’t like it, you can complain about that too.