Why Wages Don't Fall During a Recession

"Yes, it’s a dense but fun read. Bewley is a top economist who was growing more and more frustrated throughout his career that the fundamental economic models of pay determination—in this case, pay adjustments during economic downturns—didn’t seem to translate into real world activity. And so he’s openly scathing towards his fellow academics in the book saying, ‘You know, at some point, you have to get out of your modelling and your equations and go talk to actual employers, who are actually determining people’s pay out there.’ And that’s what he did. And what he found was, from a sociological perspective, I think, not shocking, but still really important to understand. “Most Google workers don’t actually work for Google” The fundamental dilemma he’s trying to solve is that from a standard neoclassical framework, we’d expect employers to adjust wages downward during an economic downturn, to make up for decreased demand for goods and services. But that’s generally not what we find. And again, this brings up notions of equity—that workers do not like having their pay cut, that it’s seen as a kind of moral injury. He interviews employers who are very open about this, that the last thing you want to do is cut pay, and so you do everything you can to adjust during an economic downturn, except for cutting pay. So that’s an answer to his fundamental dilemma, but I think the work stands out for just being a nice piece of scholarship where an acclaimed economist just threw his hands up and said, ‘Forget this, I’ve got to get out of the office and go talk to some actual human beings.’"