not-so-sticky wages

One of the problems in labor markets-- and thus, the macro-economy-- is that wages often have difficulty adjusting quickly, especially in a downward manner.

If the demand for labor decreases (as in the early part of a recession) and wages cannot adjust downward, then the result will be a surplus of labor-- i.e., above-normal unemployment. If wages could adjust, then a new equilibrium would be found quickly, resulting in lower wages (temporarily) but without notable unemployment.

From the WSJ, an interesting article by Evan Ramstad about Korean workers accepting steep wage declines and preserving their jobs. (I'll be saving this one for my students!)


Shinchang Electrics Co. offered union leaders a proposal that would reduce wages at the auto-parts company by 20% in exchange for no layoffs among its 810 workers this year. Eight days later, the union agreed.

The deal is one sign of the unusual way South Korea is grappling with the global economic crisis. Across the country, executives, salaried employees and hourly workers at companies from banks to shipbuilders are joining to slash wages and other costs with the goal of avoiding layoffs....

Leaders of major industry groups, unions, civic organizations and the government hold hands after having struck a 'grand bargain for social unity' to preserve jobs in exchange for wage freezes or cuts....

In South Korea, job preservation is the government's biggest goal in shaping its response to the onset of recession, President Lee Myung-bak declared in January. Last week, leaders of major industry groups, unions, civic groups and government ministries struck a "grand bargain for social unity." Under the plan, which isn't legally binding, employers won't fire workers, unions will accept wage freezes or cuts, and the government will provide tax breaks to companies that preserve jobs.

The handshake deal raises the question of whether South Korea can survive the global recession while hanging on to traditional views about work, which include a deep aversion to layoffs. The country accomplished one of the great economic miracles of the 20th century with government-led development that embraced centuries-old notions of putting community ahead of individual achievement.

Until the 1997-98 Asian financial crisis, laying off workers was illegal, in large part to preserve that deep sense of community. And even during that crisis, which South Korea weathered better than most countries, layoffs only happened when companies collapsed -- not when they were trying to save costs, as is happening in much of the world today....