Commentary - May / June 1999

I n preparing my comment on Truman Bewley’s work, I had the privilege of reading a draft of Professor Bewley’s forthcoming book, Why Wages Don’t Fall During a Recession. This book describes an extensive field study, in which Professor Bewley interviewed hundreds of business managers and labor leaders, seeking to understand the puzzling phenomenon of wage rigidity. The paper presented here is an outgrowth of this project. Before turning to the paper itself, I would like to make a few comments about the research enterprise more generally. I am quite enthusiastic about the manuscript I read. There are three reasons why you should read this book. First, you will learn a lot of economics. In the course of discussing ideas raised in his interviews, Professor Bewley cites and discusses a vast literature (his book cites more than 1,000 papers!). The book provides an engaging way of becoming acquainted with the issues currently under debate in the study of motivation, compensation, labor markets, and macroeconomics. Second, the research makes important headway in understanding the nature of rigidities in labor markets. Bewley makes a number of striking and controversial claims about labor markets, but always in a clear, well-reasoned, and convincing manner. Finally, the book will challenge you to think hard about how to “do economics.” Economic theorists generally implicitly follow the path laid out by Milton Friedman (1953): We hope that even though our assumptions are often self-consciously unrealistic, useful predictions about behavior can nonetheless be derived. Bewley’s book reminds us that when assumptions drift too far from reality, theory is a futile exercise with no hope of shedding light on behavior. Professor Bewley describes the central conclusion of his work as follows: