Do you understand the ‘Sticky-Wage Theory’? Should you care?

If you adhere to the “Sticky-Wage Theory,” you gave your workers a raise recently. If you don’t, then you didn’t. Maybe this needs a bit more explaining.

First, a couple of government reports show:

  • From September 2008 (the collapse of Lehman Brothers) until June 2009, the average weekly pay for hourly workers stayed stuck on $612. (Hourly pay actually rose a bit during that period, but that gain was canceled out because a lot of workers had their hours cut.)
  • Since June, however, both the length of the workweek and hourly pay growth have crept upward. In August, the average weekly pay hit $618.

Do the rising numbers indicate that the economy really improved? Some say it did, and of course Fed Chairman Ben Bernanke pronunced the recession over. Some economists have another explanation.

They say many companies have decided that cutting wages isn’t worth the aggravation and morale busting that inevitably follow the cuts. So even companies that have been forced to lay off workers have also given surviving employees a little boost in the paycheck. There’s even a economics term for the phenomenon: The Sticky-Wage Theory.

The shadow of unemployment
Still, there’s the shadow of unemployment. It doesn’t translate into lower average wages because the wage figure doesn’t take into account unemployed people, who have zero wages. The result: Fewer workers making a bit more money, meaning the median household income has gone down even while weekly pay has gone up.

Another statistic from the reports: There’s very little “churn” among the unemployed. That is, unemployed people are likely to stay unemployed for longer periods, while people who are working are more likely to hang on to their jobs. That’s a switch from the past, when the economy would produce rapid turnover among the employed and unemployed.

Click here to see the August labor summary from the Bureau of Labor Statistics.

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