Sticky Wages

Definition

Sticky wages refer to the phenomenon where wages tend to remain relatively fixed or resistant to change, even in the face of shifts in economic conditions. This concept is particularly relevant in the context of understanding short-run changes in unemployment, the building blocks of Keynesian analysis, the Keynesian perspective on market forces, and the balancing of Keynesian and neoclassical models.

5 Must Know Facts For Your Next Test

1. Sticky wages are a key component of Keynesian economic theory, which emphasizes the role of aggregate demand in determining output and employment levels.
2. Sticky wages can lead to unemployment, as firms may be unable or unwilling to reduce wages in response to a decrease in demand for their products.
3. Factors contributing to wage stickiness include long-term labor contracts, social norms, and the reluctance of firms to reduce wages due to concerns about employee morale and productivity.
4. The concept of sticky wages is used to explain why the labor market may not clear, leading to persistent unemployment, even in the short run.
5. Sticky wages are a crucial element in the Keynesian perspective on market forces, where the assumption of flexible prices and wages is challenged, and the role of government intervention is emphasized.

Review Questions

• Explain how the concept of sticky wages relates to changes in unemployment over the short run.
  • The concept of sticky wages is central to understanding short-run changes in unemployment. When there is a decrease in aggregate demand, firms may be unable or unwilling to reduce wages, leading to a surplus of labor and an increase in unemployment. Sticky wages prevent the labor market from clearing, as wages do not adjust quickly to restore equilibrium between the supply and demand for labor. This can result in persistent unemployment, even in the short run, as firms are unable to reduce wages to the market-clearing level.
• Describe the role of sticky wages in the building blocks of Keynesian analysis.
  • In the Keynesian framework, sticky wages are a crucial building block. Keynesian economists argue that wages and prices do not adjust quickly to changes in economic conditions, leading to the possibility of persistent unemployment. The assumption of sticky wages is central to Keynesian models, which emphasize the importance of aggregate demand in determining output and employment levels. Sticky wages allow for the possibility of involuntary unemployment, as firms may be unable or unwilling to reduce wages in response to a decrease in demand for their products.
• Analyze how the Keynesian perspective on market forces is influenced by the concept of sticky wages.
  • The Keynesian perspective on market forces challenges the neoclassical assumption of flexible prices and wages. The concept of sticky wages is a key element in this Keynesian view, as it suggests that the labor market may not clear, even in the short run. Keynesian economists argue that the presence of sticky wages can lead to persistent unemployment, as firms are unable or unwilling to reduce wages to the market-clearing level. This perspective emphasizes the role of government intervention, such as fiscal and monetary policies, to address issues of unemployment and stabilize the economy, in contrast to the neoclassical belief in the self-correcting nature of market forces.

Related terms

Nominal Wage: The actual monetary amount paid to workers, without accounting for changes in the price level or inflation.

Real Wage: The purchasing power of a worker's nominal wage, calculated by adjusting for changes in the overall price level.

Wage Rigidity:

The inability or unwillingness of wages to adjust quickly to changes in economic conditions, such as shifts in supply and demand.