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Tuesday, May 5, 2009

What I'm reading

I've long believed that theories of nominal wage stickiness and price stickiness, while useful in part, really seemed to miss the big picture. Turns out that back in 1999, a piece was written by little known economist Truman Bewley that took a more "all encompassing" heterodox approach to asking why firms prefer layoffs to wage cuts in a recession. By surveying hundreds of actual business people (as opposed to just looking introspectively to the Ivory Tower for answers), and by understanding common sense psychology, he came up with the "Morale" theory of wage rigidity - which for my money, makes the most sense in reality as to why wages are sticky.

Morale theory basically states that firms hold nominal wages rigid in recessions primarily to avoid demoralizing workers and reducing their overall job satisfaction, thereby avoiding the long-run negative such demoralization and disruption to existing employees can have on a corporate culture.

It's something that I've been thinking about for a while and discussing in my macro class, but something I never knew was already researched. So I was excited to learn of Mr. Bewley's contribution, and sadly, don't understand why mainstream econ isn't incorporating his work more on the macro side (actually, I have a hunch why they haven't, as readers of my blog can probably guess my feeling). So, I was equally excited to find this paper, which statistically seems to validate Mr. Bewley's ideas.

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