Sticky Wages Really do Explain the Recent Recession

From a study by Mary Daly and Bart Hobijn at the San Francisco Fed:

Although our model simulations are not intended to match the data, they are remarkably consistent with data on both individual level wage changes and the dynamics of unemployment and wage growth observed for the U.S. since the 2007 recession. To show this, we update the results from Card and Hyslop (1997) and compare the changes in the histogram of log nominal wage changes between before the recession in 2006 and after the recession in 2011 with the changes in the distribution of log nominal wage changes implied by our model along its transition path.

In addition, we construct a U.S. wage Phillips curve for 1986-2012 and show that, since 2007, (i) unemployment first rose significantly while wage growth remained flat and (ii) subsequently fell while wage growth decelerated. This is consistent with the two ways in which downward nominal wage rigidities bend the Phillips curve following a large negative demand shock in our model.

We interpret these results as evidence that downward nominal wage rigidities have been an important force shaping the dynamics of unemployment, wage growth, and inflation over the period from 2006-2012.

File under further confirmation of the “musical chairs” model.

Saturos sent me an excellent FT piece by Chris Giles.  But I’d quibble slightly with this:

With the annual growth rate of nominal GDP being so important, it is extremely disappointing that Mark Carney, incoming governor of the BoE, has backed-away from his suggestion that targeting its value would help in a depressed environment.

I think the real problem here is that Cameron and Osborne didn’t give the BoE an NGDP target.  Without that sort of explicit mandate, it’s awful hard for Osborne to suddenly shift BoE policy so radically.  Perhaps the government felt that abandoning the 2% inflation target it would be too controversial, especially with Ed Balls insisting that the 2% target should be maintained.  Why is Balls so opposed to higher AD?

And Britmouse wonders why Paul Krugman is calling for fiscal stimulus, rather than a higher inflation target in Britain.

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