Cutting Wages Is Hard to Do: Why That's Bad for Unemployment

Even with the recession and bumpy recovery, it’s hard to cut pay

In Jackson Hole, Wyo., this August, Janet Yellen, chair of the Federal Reserve, gave a speech explaining just how hard it is to understand unemployment. She made passing mention of an idea only an economist could love: “downward nominal wage rigidity.” In plain English, that means it’s hard for any company to cut pay, even in a recession. Economists sometimes call this “wage stickiness.” Depending on your brand of economics, stickiness either makes no sense and therefore only happens because of bad policies, or it’s a significant, enduring problem that worsens unemployment. Yellen seems to be leaning toward “enduring problem.”

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