Monday, July 29, 2013

Sticky Wages vs. Sticky Employment

Here is an interesting article that suggests unemployment manifests itself differently in Japan compared to other developed economies, because companies here tend to try to hold wages, so they cut costs through layoffs.  In Japan, they cut wages in order to avoid layoffs.

Here, we consider sticky wages to be a market friction that the Fed can lessen through inflation, but how would we deal with the Japanese labor market?  I suppose inflation would help there, too, as wages of unproductive workers would be pushed down in real terms as other workers received cost of living raises.  Rising profits would lead to new investment where those workers could be productive again.  But, the act of leaving the original job for a new job would still have to overcome a lot of labor market frictions, with search costs, etc.

This is counterintuitive.  We normally would consider sticky wages to be a market imperfection, but it seems like maybe in the long run, layoffs allow for a more efficient transition to new productive outlets for labor.

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