ABSTRACT
According to an article in the New York Times, the leading explanation of why inflation has been so limited these last three years—despite low unemployment rates—is that wage demands have been held down by an unusually high degree of “worker uncertainty.” Substantial effort has gone into identifying the sources of this presumed insecurity in the face of a rather buoyant labor market. The most commonly mentioned reasons are the threat of middle-management layoffs, competition from foreign workers, and less unionization, all of which are believed to reduce wage inflation by making workers think twice before requesting higher pay even if their firms’ balance sheets have improved. In adjusting their firms’ nominal wage structure, they look foremost at the wages paid by other firms, then at cost-of-living indexes, and last at their own firms’ financial results.
