HOW TWO ECONOMISTS DECIDED HOW MUCH TO PAY THEIR BABY SITTERS. This article by Benyamin Applebaum in the New York Times (October 9) about Janet Yellen’s appointment to head the Federal Reserve Board begins with a a story about a paper that she wrote jointly with her husband George Akerlof (a winner of the Nobel Prize in Economics). The paper provided an explanation for why wages remain “sticky” during recessions—employers don’t cut wages to clear the labor market when unemployment increases. Their argument was that cutting wages would destroy the morale of employees. The paper used the example that parents often pay baby sitters more than what might be the going rate because they want to have happier baby sitters. The paper was based on their own decision to pay baby sitters for their son more than the going wage for baby sitters.
This is an apt story because the existence of “sticky” wages is important to Janet Yellen’s new job; it is a step in the argument that monetary stimulus by the Fed can lead to higher employment.