Wednesday, November 11, 2015

Is micro stickiness enough?

Many people look at this diagram from the SF Fed (see the discussion here) and see evidence of sticky wages at the micro level:

That spike at zero wage change changes from 12% to 16% and the result is 10% unemployment and a recession. Or so says Scott Sumner today, Paul Krugman in 2012, and commenter Bill here.

The question is -- can you tell the difference between the path of aggregate wages using those two empirical distributions to generate wage changes for the population? Not really. Here is the empirical distribution:

And here are several aggregate paths generated from that distribution:

Hard to tell, right? The blue line is the sticky one. And that's after 200 years of one being in a recession and one not! (The distribution from the SF Fed used annual changes, so each time step is a year.) It's only a few hundred people, not the millions in the labor force. So what would we expect if we did look at millions of agents? Here are the empirical distributions generated from more points:

The difference in the average of these two distributions is about 0.1 to 0.2 percentage points, so the difference in total aggregate wage change between populations with these two distributions is about 15 billion dollars = (0.2% x 7 trillion dollars). The US economy suffers a recession -- losing a several percent of GDP -- because the market cannot unstick 15 billion dollars?

That's why I think it's not the micro-stickiness of the zero bin, but rather the macro stickiness of being unable to coordinate a change in the whole distribution. The zero bin does contribute! In the previous link, it seems the observed 4% change in the zero bin would account for about 2% of the 8% NGDP loss (but from the entropy mechanism -- not lack of adjustment, they could all jump in the 1% growth bin or 5% growth bin and get the exact same effect on economic entropy that I wrote about again today). So the total effect looks like it's a bit of micro stickiness (but not for traditional economic reasons), but mostly macro stickiness.


  1. I see that I was not clear with my previous comment. I do think that the spike at 0 indicates wage stickiness, that without it the wages with 0 change would be different, and not with a mean of 0. But I think that the stickiness is in the opposite direction, that without the spike at 0 the average wage would be higher than it is. Prices are being suppressed, whether there is a recession or not.

    Now, that is a guess, because I do not have enough information to say. The graphs are bimodal, and unless we know what that means, we cannot interpret the difference between the two graphs. But as I am not an expert, I am willing to speculate. If I were writing a paper I would do the work. :)

    1. Hi Bill, I think I understand.

      The macro stickiness would work in both ways -- keeping wages from growing or falling since both of those require changes in the distribution.


Comments are welcome. Please see the Moderation and comment policy.

Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.