Is Boosting Teacher Pay a Legitimate Use of the Stimulus?

That is the question raised by a recent headline from Fairfax County:

“Fairfax Teachers Fight for Raises Funded by Stimulus”

Now I don’t know whether teachers in Fairfax are underpaid or overpaid. And there may very well be good reason to boost their salaries (or at least to boost those of the top performers). But it makes little sense to argue that a salary boost right now would serve the original purpose of the stimulus (which was intended to stimulate the economy, for those who are still paying attention). 

Let’s try to look at this the way a Keynesian would. As Brian Caplan explained a few months back, an important element in the Keynesian model is the notion of wage rigidity. Here, according to Keynesians, is how it works:

  1. Trouble begins when aggregate demand falls (usually because animal spirits have caused a sharp decrease in investment).
  2. As this happens, firms have less revenue with which to pay salaries. They might be able to maintain employment, however, if they could convince their employees to take a real wage cut. 
  3. The problem, however, is that nominal wages are “sticky.” Employees do not want to accept lower wages and even if they did, employers would rather fire some people than lower everyone’s wage and have a disgruntled workforce.

The Keynesian solution to this dilemma is to somehow boost aggregate demand to get people spending again. As Brian has more-recently pointed out, an alternative solution that is completely consistent with the Keynesian diagnosis of the problem would be to make sure that all prices—including wages—are as fluid as possible. If we could reduce nominal wage stickiness and get people to accept lower wages during a recession, then we could lower the unemployment rate.

Somehow in practice, however, Keynesian policy usually ends up increasing nominal wage stickiness and the Fairfax teacher story is a case in point.

Addendum: My colleague, Veronique de Rugy, weighs in at NRO, noting that the Administration changed the rules in February to permit stimulus funds to be used for such a purpose.

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