From: My Department of Credit Where Credit Is Due

I’ve previously insisted that when there’s high unemployment, all good Keynesians should say “Wages must fall!” I’m delighted to learn, then, that Janet Yellen is one of the good Keynesians.

The stagnation in wages despite a pickup in hiring

over the past few years has been one of the recovery’s most perplexing

puzzles. But maybe the real problem isn’t lack of growth. It’s that

wages didn’t fall enough during the recession.

That idea was floated by none other than Federal Reserve Chair Janet Yellen during a speech on

the labor market last month during an elite central banking conference

in Jackson Hole, Wyo. She used a much fancier term — “pent-up wage

deflation” — but it essentially means that employers are keeping

workers’ pay flat now to make up for not cutting it during the downturn.

[…]

…By leaving workers’ wages unchanged

during the recession, businesses were essentially overpaying their

employees. Once the recovery starts, they make up the difference the

same way — keeping wages flat despite an improving economy.

Normally, rising inflation during a recovery helps businesses reduce

costs even if wages remain unchanged. But the recovery from the Great

Recession has been characterized by particularly low inflation — which

is likely lengthening the time firms need to keep wages flat.