by Andrew White | March 14, 2019 | Comments Off on Economics Corner: Are Prices and Wages Sticky? It Depends…
Wages tend, if they ever move, to go up but rarely down. You may have had personal experience that reinforces this observation. If you are a retailer then your labor costs are in nominal terms basically flat or up, from year to year. If the economy does well, business might be good, so you raise wages, and perhaps prices too. But if the economy slows down or contracts, wages tend not to contract; perhaps some workers are laid-off entirely so reducing the overall labor costs while keeping labor rates relatively flat.
This behavior is known in economic circles as stickiness. Wages and prices do not move as dynamically as we might think they would given market changes. Prices are said to be sticky; they do not change always in response to changes in demand and supply. We tend not to be able to lower wages as easily as they are raised; just think of the friction that would create at work. So there you have it. Or maybe not.
An article in January’s The American Economic Review, titled “The Cyclicality of Sales, Regular and Effective Prices: Business cycle and policy implications: Reply”, the authors (Olivier Coibion, Yuriy Gorodnichenko, and Gee Hee Hong) unearth some behavior that is not captured in the idea of stickiness. The article, as the title suggests, is a response to some other economic article that critiqued the author’s original article.
The new behavior affirmed the general principle of stickiness. However, by studying how people shop during the business cycle of growth and contraction, some interesting things were discovered. Apparently as growth fades and contraction or slow down appear, some shoppers change the retailer they use for some of the products acquired. At the same time the actual price posted by the two retailers, the original and the newly selected, do not change that much. In other words, for the same relative products, consumers may switch retailers to a slight lower priced channel, even though prices do not appear to change.
This observation was made by tracking both the price posted for goods by retailer and the price paid by consumers. The former did not change that much; the latter followed the business cycle- it went up in good times and down in bad. This observation helps explain how consumer behavior cannot be explained by studying retailer behavior alone; and vice versa.
If you are a retailer, or a Gartner client, what does this tell you? Simply that by focusing on the problem or opportunity in focus you may miss what is more important. Even employing systems thinking to break down the problem into constituent elements may not help if the original focus was too narrow. Even if our models seem to explain an observation, this does not itself mean we really understand what is happening. A model is just that, a model; it is not a prediction.
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