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Matt Yglesias recently made the following comments on the Chicago teacher strike:

Reading up on the Chicago Teachers’ Union strike , I note not for the first time that in the real world nominal figures, rather than so-called “real” ones, matter a great deal:

I take it that both sides are assuming that the Federal Reserve will persist in its policy of keeping inflation at close to but less than 2 percent per year, but there’s no guarantee of this. And yet that’s exactly how people negotiate deals””whether it’s an apartment lease or a two-year cell phone commitment or a teacher’s salary deal. We’re all enmeshed in a vast web of implicit and explicit nominal agreements, and in practice we tend to think in nominal terms.

“Pay is also an issue. However, the union said the two sides are close to a pay agreement after school officials offered a deal that would increase salaries 16% over four years. The average teacher salary in Chicago was $74,839 for the 2011-2012 school year, according to the district.”

It seems a bit weird to some people sometimes to assert that nominal shocks matter, but when you look at this kind of thing you see that it couldn’t be any other way.

People often ask me why wages have not yet adjusted to the 2007-08 recession. I think they have, which is why unemployment has fallen from 10% to 8.1%. But they have not yet adjusted to the NGDP shortfall of 2009-11, which is itself rather surprising. This article helps us to understand why. At first glance it looks like Chicago public school teacher wages are sticky for a period of 4 years, but in practice the problem is likely to be much worse.

Assume the wage agreement was negotiated on the assumption that US per capita NGDP would grow at 4% a year over time. Then assume that actual NGDP growth was 2% (roughly the actual rate since mid-2008.) How likely is it that the Chicago Teachers Union would come to the next negotiation with the following attitude: “We see that our teachers got 8% bigger raises (relative to NGDP) than we anticipated or deserved. Hence will start off the new round of negotiation with an immediate 8% pay cut.”

The problem here is that workers in safe sectors like health care have little fear of job loss, and hence have very sticky wages. Even worse, wages in some of the most flexible sectors (such as low wage jobs), cannot be brought into line because of the recent 40% boost in the minimum wage. Thus those workers in the remaining sectors need to accept much greater than 10% wage cuts, to make up for the 10% undershoot of NGDP.

They don’t, which is why big NGDP shortfalls create lots of unemployment.