Wage Rigidity in Historical Perspective

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This is an interesting and important project, which investigates the sources of unemployment arising from economic rigidities in the wage system used to compensate labor. Early classical models of the economy assumed that wages and prices adjusted easily to changes in economic variables, and that the labor market always employed all workers willing to work at the going wage. The Great Depression provided overwhelming empirical evidence that those models were not correct. Most modern models of employment include, either implicitly or explicitly, the concept of a natural rate of unemployment. This is the rate which would exist if everyone who is willing to work at a given wage can find employment. That is not to say unemployment will be zero. Some jobs are seasonal. For instance, construction is more prevalent in the spring and summer than in winter. In northern climates some construction workers will be unemployed, at least part of the time, during the winter months. Such structural unemployment is inherent in any advanced economy, and for the sake of conceptual clarity in labor market models, is considered to constitute the so- called natural rate of unemployment. A fundamental question of concern to analysts and policy makers is why the actual unemployment rate might be greater than the natural rate. A reason suggested by economic theory is that employment cannot adjust to changing market conditions easily, in particular real wages (that is the purchasing power of wages) do not adjust quickly. The most prominent theories of wage rigidity focus on such factors as overlapping contracts between labor and employers, efficiency wages, and, especially, incorrect expectations of the future purchasing power of wages. This research examines wage rigidity in the United States over the past century, and by doing so, it extends our empirical knowledge of wage rigidity in several ways. First, a much wider range of indicators of rigidity is analyzed than in any previous study. It incorporates cross industry variation in wage structure. Another innovation of this project is the use of U.S. industry wage data dating back to 1860 to explore in depth whether there have been structural changes in the labor market, to document the sources of those changes, and to analyze their macroeconomic impact. Little comparative analysis of labor market performance across historical periods has been done previous to this work. Professor Miron is a talented young empiricist, and has done fine work in analyzing the labor market in the past.