Sticky wages are real says the new data

If you're one of these anti-Keynesians, I have a challenge for you: Read Truman Bewley's Why Wages Don't Fall During a Recession from cover to cover. Please. Brian Kaplan

Brian gives the book a good review and the book has solid evidence that lowering wages in a firm is rarely done, wages are sticky. I trust Brian, and will work on a response. If wages are sticky, then sticky are the wages; we have to incorporate the fact.


The Keynesian part comes in because the New Keynesians model says wages, mostly, are sticky. So, sticky empirical wages give the Keynesians proof of one basic assumption.  I am not an anti-Keynesian, its just they do not understand portfolio theory.

My approach is to key on the recession, because that is where my action is, how does the economy delever, what does that mean, and how are wages mixed in the process. My fundamentals are portfolio theory under semi-orthogonal conditions. In other words, semi-orhogonal means every thing is chained to each other, like an assembly line. The recession begins when the major investors/brokers contract (reduce the numer of asset classes) in their portolios, and that starts a portfolio contraction down the line. A portfolio contraction is a reduction in the number of unique classes the firm or house hold keep in inventory.

The firm portfolio is mainly the types of value added in their product lines. A contraction generally means dumping whole groups from deleted product lines. So, for the worker, well most workers (I was the exception to the rule), and for the firm; there is no wage reduction. Your group is being sold or eliminated. The remaining groups are likely to be combined and simplified. (In my case, I just got bored with the firm or the firm got bored with me).

In other words, the stickiness is a natural by product of finite systems with low dimensionality. With specialization comes inflexibility, the integer piece comprises a whole group of workers. The remaining groups justify their continuing nominal salaries by gains from consolidation and productivity.

What about stimulus? That happens when a large firm in the market takes advantage of loose inventory, right after a portfolio contraction.  The large firm re-organizes the market for more productivity than was lost in the downturn. The classic case is, again, IBM and the pc architecture. Or Hoover and the road builders. Stimulus is real, in finite theory it is almost the only way to grow.

Chained portfolio theory is like value added theory. Does each contributor fit properly into the portolio container, like making an airplane from supplier parts. But its strong, is a better match to how we think. We focus on maintaining the current set that makes up our life, we always try to return to the same set, and it has size and rate. We are container ergodic, we want to keep the container we have.

My issue is what market needs fixing, and that market is the democracy market; the cost of maintaining small and large states in the same framework. So we go into this value added framework. The four large states want the federal government to operate with block grants, issue wholesale insurance. Small states what federal government to engage in a variety of activities, as long as the management is concentrated in DC where small states get economies of scale.

In this environment, a stimulus is a pivot. A good pivot, say at the start of Obama's presidency, would have been to eliminate NCLB altogether, and re-use the money for dollar matching supplemental pension savings for all bonafide teachers. That is a better portfolio structure, Obama missed a good opportuniy.