Sticky Wages, Sticky Expectations: The Case for Accepting a Smaller Salary


Unemployment Report

Unemployment Report by Mike Licht,, on Flickr

In times of recession, we are often plagued by what economists call "sticky wages": when demand falls, wages don't.  The result is falling output and rising unemployment.    You can argue that we'd all be better off if everyone took a 10% pay cut, rather than most people keeping their salaries, while a minority gets a 100% pay cut. (More later on why this is a complicated question).    But such an argument is rather academic, since this is not what happens.

It's easy enough to understand why it doesn't, within existing firms: workers are not going to react well to an announcement that everyone's taking a pay cut. (Witness the Verizon workers out on a bitter strike over higher contributions to their health insurance.)  But it's more of a puzzle for the unemployed.  Surely, something is better than nothing, and we shouldn't have to worry about loss aversion, since you've already lost your job.

Tyler Cowen has been blogging this question, with interesting response from Scott Sumner and others. This morning he posts a reader comment, which suggests an intuitively plausible solution to this puzzle: it's the employer, not the workers, who drive wage stickiness for the unemployed.  Willingness to accept lower wages grows rapidly as the term of unemployment stretches out.  But willingness to offer lower wages may not.

This makes a lot of sense.  You can tell a story where people are just stupid and stubborn, but it's not really a very plausible story--eventually, those people have to eat.  But for employers, it's different.  There are usually other workers applying for any given job.  Hiring someone who has previously made more is risky: they may be malcontent.  Or they may leave you as soon as they see a better opportunity.

This also might help explain why it took World War II to end the unemployment of the 1930s. There weren't other workers who were available, so employers overcame reservations about things like wage stickiness and long-term unemployment.

Of course, we're not going to have World War II again, so what can an individual do?

Come up with a good story about why you're willing to accept lower wages.  When I was interviewing for my first job at The Economist, they asked me flat out why an MBA would be willing to take a job that paid $40,000.  Part of the answer was, of course, that I needed a job.  But that's not what I said.  What I said was also true: "I'm only going to be on the planet for a few short years.  I want to do something that's a lot more important to me than making money."

I got the job.  It now occurs to me that I might not, if my answer had sounded anything like "I need a job."
Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities

Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus


Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.


Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.


Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.


Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.


The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air



More in Business

Just In