The Stickiness — The Cycle, Plate vii

The wage is a promise made before the next order arrives. A firm hires on terms its workers can plan around; a household undertakes expenses that will survive the next disappointing week of sales. When spending falls, those promises do not disappear together. Some prices change at once, some at the next negotiation, and some only after someone decides that changing them is worth the trouble. The earlier Neutral placed this uneven adjustment at the hinge between money and production. Here the question comes closer to the worker: why can a wage remain unchanged while employment falls, and why might a general willingness to accept less still fail to bring every willing person back to work?

A wage written in money and a wage measured in goods can move in different directions. Consider an invented economy in which an hour pays twenty dollars and a basket costs ten: the real wage is two baskets. If the basket falls to nine dollars while the wage stays fixed, the hour now commands about 2.22 baskets. The employer facing a lower selling price encounters a higher wage relative to that price. Cut the money wage to eighteen dollars as well, and the real wage returns to two baskets. The worker's smaller pay envelope alone tells us neither the change in purchasing power nor the change in the employer's real cost. We must follow the prices, incomes, and obligations that move alongside it.¹

1. An invented accounting example: real wage = money wage ÷ basket price; 20 ÷ 10 = 2, 20 ÷ 9 ≈ 2.22, and 18 ÷ 9 = 2. The basket is assumed to represent both consumption and the firm's output for this illustration. Different consumption and selling prices would require separate calculations.

Keeping a price unchanged can be a deliberate decision whose private logic leaves a wider loss. A contract settles a number for a period; revising a price requires information, communication, and sometimes a new bargain with the customer. Firms and workers can also care about their position relative to others who have yet to move. Mankiw's menu-cost argument isolates one difficulty: a seller may gain too little from a price adjustment to justify making it, even when buyers would gain enough to make the adjustment socially worthwhile. The smallness of the administrative cost therefore does not settle the size of the economic consequence. The relevant comparison includes gains that the decision-maker cannot collect.²

2. N. Gregory Mankiw, Small Menu Costs and Large Business Cycles (1985), pp. 529–537, particularly the contraction case and Proposition 2. The paper uses a static monopoly model; its final discussion identifies dynamics and unsynchronized price changes as matters left outside that model.

⁂

A small numerical market makes that difference visible. Suppose, after a fall in demand, buyers will purchase a quantity equal to one hundred minus the posted price, and each unit costs twenty to produce. At an inherited price of sixty-five, the seller sells thirty-five units and earns 1,575 before any cost of changing the price. Cutting the price to sixty raises sales to forty and profit to 1,600: a gain of twenty-five. If revising the price costs thirty, the seller leaves it alone. Yet the extra trades and the lower price increase combined buyer and seller surplus by 212.50 before that expense, or 182.50 after it. A reasonable decision for the seller can leave worthwhile exchanges undone. This is one firm's illustrative calculation; explaining an economy-wide slump requires showing how such decisions interact.³

3. An invented partial-equilibrium example, not an estimate or Mankiw's calibration. Demand is Q = 100 − P, marginal cost is 20, and changing the price costs 30. Profit is (P − 20)(100 − P), maximized at P = 60. Gross total surplus is 80Q − Q²/2: 2,187.50 at Q = 35 and 2,400 at Q = 40. The net social gain is 212.50 − 30 = 182.50; the seller's net gain is 25 − 30 = −5.

A general wage cut changes the demand for what workers make as well as the cost of making it. Keynes's objection was to carrying a single industry's labor-demand schedule unchanged into the economy as a whole. Lower money wages can redistribute income, alter spending, affect investment expectations, and change the demand for money. Some channels can help employment: lower interest rates or improved export competitiveness may support expenditure. Others can hurt: debt becomes harder to carry when nominal incomes fall, and an expectation of further price declines can delay purchases. The result depends on these responses. The claim that every wage must fall until every worker is hired skips the very adjustment in aggregate demand that needs explaining.⁴

4. John Maynard Keynes, The General Theory, chapter 19, Changes in Money-Wages (1936), sections I–III. Keynes expressly allows circumstances in which wage reductions stimulate output; his objection concerns the presumption of automatic restoration through a general cut. This plate develops that qualification alongside the separate Wage plan.

The policy importance of stickiness depends on what has changed and on what the economy can still produce. When orders disappear while productive capacity remains available, sustaining expenditure can keep viable exchanges from being lost during the adjustment. When the available supply itself has contracted, trying to purchase the old quantity can instead intensify the pressure on prices. A wage contract tells us that an adjustment takes time; it does not identify the disturbance, measure spare capacity, or determine the right size of a response. Nor does the eventual renewal of contracts undo every intervening loss. A missed apprenticeship or an abandoned investment can affect later production even after prices have caught up. Duration matters because the path of adjustment contains decisions that cannot simply be replayed.⁵

5. The distinction between demand shortfall, changed productive capacity, and later damage develops the earlier Neutral. The supply question returns in The Shock; persistent consequences belong to The Scar. These are separate mechanisms, whose importance must be established for the episode being explained.

The refusal of wages and prices to move together gives a disturbance room to become a loss of work. The promise that steadies one household can delay an adjustment elsewhere; the seller's sensible calculation can leave gains from trade beyond the seller's reach. But the deeper lesson survives even a world willing to renegotiate. An economy's purchasers live on the incomes its producers pay, and changing those incomes changes the conditions under which another worker is hired. The question therefore reaches beyond the patience required for a price to move. It asks whether the spending that would sustain employment will exist when the movement is over. The Idle takes up that question at the level of the whole economy.