Can the Austrian school explain sticky wages?

I consider myself to be mostly in the New Keynsian school of thought but have been more receptive to Austrian school insights more and more over time. It seems that in most industries there is some kind of price rigidity on wages so that they are almost always sticky on the downside. In other words, wages rise more easily than they fall even when the balance between supply and demand is at a wage rate that is lower than the current rate by a large degree.

Can "sticky wages" be derived from the axioms of human action or has any Austrian school economists written about this subject? Any other thoughts about "sticky wages"?

Solid_Choke

Certainly human action being what it is will do whatever it can to prevent its wages from falling.  However, the only way that this "stickyness" can occur is through government intervention.  Government intervention is, of course, alwasy backed by force.  Such legislation would include the preventing the laying off or firing of workers, minimum wage etc.  Without this intervention in what would otherwise be private contracts for mutual benefit, there would be no downward stickyness. 

Interestingly, the emperical evidence is there where there is less such government intervention on wages, there is more upward movement in wages, and greater real wealth.

Regards

Remnant.

Regarding the action axiom, as an Aristotelian I do not adhere to the typical Kantian view held by most Austrians, i.e. that all of economics is merely unpacked from the axiom. Rather, concepts must be formed by way of induction first. The action axiom holds as an incontestable truth a priori. So, for the concept of wages one would take both the axiom of action and some subsidiary empirical postulates (e.g. the disutility of labour), meaning concept-formation is not purely logical but will also include some non-logical parameters. Note that I am using the words induction (process of observing the facts of reality and integrating them into concepts) and empirical in their classical sense, not in the modern positivist way. For a more developed explanation of this, I'd recommend you read Geoffrey A. Plauche's On Praxeology and the Question of Aristotelian Apriorism. Here's an excerpt:

Properly formed concepts involve an understanding of the essences (identities or natures)

of the phenomena these concepts represent (induction); and therefore also the ability to

identify the intelligible structures resulting from the logically necessary interrelationships

of said phenomena and the ability to apply these concepts in practice, to recognize

instances of the concepts in experience and to subsume new instances under them

(deduction).

Knowledge, for Aristotle derives from experience but is also constitutive of

it; and yet, such knowledge is not a matter of making hypothetical generalizations from

atomistic phenomena and then repeatedly testing them but of grasping the universal when

we perceive the particular. That man is a rational animal is a conceptual truth arrived at

via induction;

Provided Austrians form their concepts properly, all deductions will yield theorems that hold necessarily. Neo-Kantians tend to ignore the role of concept-formation. Aristotelianism thus provides a better understanding of methodological dualism and apriorism in economics.

-Jon

Solid_Choke:

It seems that in most industries there is some kind of price rigidity on wages so that they are almost always sticky on the downside. In other words, wages rise more easily than they fall even when the balance between supply and demand is at a wage rate that is lower than the current rate by a large degree.

 Is there actually any evidence of this in the absence a central bank, and labour regulations?

Because otherwise it doesn't strike me as odd that wages tend to rise more easily.

Wages are set at the margin. If an employer signed a contract with an employee that overvalued his wages, he may not want to cut wages in order to avoid a disgruntled employee. However, future employees will get the new market wage. The old wages are considered to be sunk costs.

I think that the idea of "sticky wages" is valid. Along with the problems such as government and union control of wages, for some people, it's simply hard to accept that their wages could drop from one year to the next. It's a psychological thing, and it's unfortunate if people refuse to accept a lower wage even if it means that they can buy just as many goods with the lower wage as before.

The problem that I have with Keynesian ideology is that they try to "fix" the problem by pumping money into the system and decreasing the value of the dollar. In this way, employees see their wages stay the same or even go up in nominal terms, while in reality their real wage declines. Employees are basically tricked into accepting the lower wage that they had previously refused.

So sticky wages are a problem, but they're a problem that sometimes comes from sheer irrationality. Instead of trying to fool employees, people should be able to make their own decisions based on the real information of prices/wages. People will eventually figure out their irrationality.

Of course, people would probably be more willing to accept lower wages if prices were not continually increasing due to an inflating money supply. I think that upon eliminating a central bank it will take some time for people to get over the idea that the wages and salaries should constantly be going up.

If you take out all government intervention, prices and wages will be less sticky. However, menu costs, contracts, training costs, etc. will still keep a certain degree of "stickiness" in the market. This is only natural.

On the other hand, the reason I don't consider myself new Keynesian is because their answer to sticky prices is just plain wrong. Monetary expansion will just start another business cycle, as it will cause serious malinvestment and speculation. The only way to keep such a system still operating without going into a bust is to keep on expanding the money supply exponentially, which would ultimately create a flight from that currency.

Prices and wages can also be sticky due to ignorance (i.e. lack of perfect knowledge).  I read an article not too long ago about how Chinese take-out places tend to have the same prices from the day they open, which seems about right to me (I still use menus that are years old and the prices are the same).

You are correct that there is great hostility to wage reductions. There has always been hostility and it is easy to understand why. from the point of view of worker psychology.

However, it is only in the 20th century that the labor movement became poltically powerful.  In the 19th century they had been broadly cast as illegal certels, that is as illegal conspiracies in restraint of trade.  But in the 20th they were largely successful in warping the law in their favor.  In Mises' words:

"In all countries the labor unions have actually acquired the privilege of violent action. The governments have abandoned in their favor the essential attribute of government, the exclusive power and right to resort to violent coercion and compulsion. Of course, the laws which make it a criminal offense for any citizen to resort - except in case of self-defense - to violent action have not been formally repealed or amended. However, actually labor union violence is tolerated within broad limits. The labor unions are practically free to prevent by force anybody from defying their orders concerning wage rates and other labor conditions."

It is in this light that the appalling inflation of the 20th century must be seen  It was a strategem to undo the power of the unions to maintain or raise wage-rates.

However, inflation is no longer an effective tool, because it is now taken for granted, and the unions have protected themseles by inserting CPI clauses into labor contracts.  (Though governments have gained breathing space by watering down the CPI - by hedonic adjustments etc - so that it now understates retail inflation.)

Under a gold standard, there would probably be a steady, gradual INcrease in the purchasing power of money.  That is, prices would fall.  The unions have now been conditioned to the idea that their wages should reflect changes in the purchasing power of money.  They might, therefore, be more receptive to the idea that wages should fall gradually in sync with other prices, i.e. that a negative CPI should be applied.  In any case, over the past 30-40 years the labor unions have lost some of the coercive powers they enjoyed in their heyday.

^ The new Keynesian claim is that prices are sticky in a free market. Obviously, trade unionism doesn't explain that. Greg Mankiw used menu costs, worker training costs, staggered prices, coordination failures, efficiency wages, etc.

You can read an entry on new Keynesian economics by Mankiw at econlib.org.