Slok on Greek Wages

Source: Torsten Slok

Torsten Slok, prodigious producer of graphs, sends this one along.

A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.

Or not, as the graph shows.


Now, obviously, it took 5 years, and those haven't been pleasant 5 years. A devaluationist might counter that an exchange rate could have fallen 25% overnight. But this graph hides the composition. I would guess that not all Greek wages went down by the same 25% -- that some are going down more than others, and that like all prices the dispersion is more interesting than the average. That process -- moving out of inefficient businesses (and government, where wages have also fallen) and into better ones -- is always painful and would not happen under a quick depreciation.

So, before critics go all nuts, I'm not making a case that wages are as flexible as exchange rates -- clearly not. But the common view that nominal wages may never fall, and eternally sticky wages account for years or decades of stagnation, just isn't true per the graph.

A slight complaint -- the graph title is "competitiveness," not "relative wages." There is a lot more than wages in "competitiveness," like, say, productivity. You can be "competitive" with very high wages if you have a dynamic, efficient, high-productivity economy. And "competitive" is a terrible word anyway -- it has a very mercantilist ring, which is not how trade works.