💶ap macroeconomics review

key term - Sticky wages

Definition

Sticky wages refer to the phenomenon where nominal wages are slow to adjust to changes in the economic environment, particularly in response to shifts in supply and demand. This rigidity can lead to unemployment or labor shortages when market conditions fluctuate, as employers may be reluctant to reduce wages during economic downturns or slow to increase them when the economy improves.

5 Must Know Facts For Your Next Test

  1. Sticky wages often result from contracts, minimum wage laws, or institutional arrangements that prevent rapid wage adjustments.
  2. When demand for goods and services decreases, firms may choose to retain workers instead of cutting wages, leading to higher unemployment rates.
  3. In periods of inflation, sticky wages can lead to decreased purchasing power for workers if nominal wages do not increase at the same rate as prices.
  4. The concept of sticky wages is crucial in understanding short-run aggregate supply because it explains why the SRAS curve slopes upward.
  5. Economists believe that the existence of sticky wages contributes to economic fluctuations, making it harder for economies to return to full employment quickly after a shock.

Review Questions

  • How do sticky wages affect the labor market during economic downturns?
    • Sticky wages can create significant challenges in the labor market during economic downturns. When demand for goods and services falls, employers may be reluctant to reduce wages due to contracts or fear of losing worker morale. Instead, they might opt for layoffs or hiring freezes, leading to higher unemployment. This situation illustrates how sticky wages can exacerbate job loss rather than facilitate a smoother adjustment in labor costs.
  • Evaluate the impact of sticky wages on aggregate supply and overall economic stability.
    • Sticky wages significantly impact aggregate supply by causing the short-run aggregate supply (SRAS) curve to slope upwards. Because wages do not adjust immediately to changes in economic conditions, firms may be slow to respond to shifts in demand. This delay can result in temporary imbalances in the economy, such as unemployment or labor shortages, which can hinder overall economic stability and growth. As a result, understanding sticky wages is essential for policymakers aiming to maintain stable economic conditions.
  • Assess how sticky wages contribute to economic fluctuations and their implications for fiscal policy.
    • Sticky wages play a critical role in contributing to economic fluctuations by preventing quick adjustments in labor costs during changing market conditions. When economies face shocks, such as recessions or booms, the lagging adjustment of wages can lead to prolonged periods of unemployment or inflation. This reality has important implications for fiscal policy; policymakers may need to implement stimulus measures or wage subsidies during downturns to help mitigate the negative effects of sticky wages and promote quicker recovery toward full employment.