Sticky wages

Definition

Sticky wages refer to the phenomenon where nominal wages do not adjust quickly to changes in economic conditions, particularly during periods of high unemployment or economic downturns. This rigidity can lead to persistent unemployment, as firms may not lower wages in response to decreased demand, resulting in a mismatch between labor supply and demand.

5 Must Know Facts For Your Next Test

1. Sticky wages challenge classical economic theories that suggest wages will always adjust to clear the labor market.
2. In John Maynard Keynes' view, sticky wages contribute to prolonged periods of unemployment during economic recessions.
3. Firms may resist lowering wages due to concerns over employee morale and potential loss of skilled workers.
4. Sticky wages can lead to wage rigidity, making it difficult for the economy to recover from downturns, as lower wages would typically encourage hiring.
5. Keynes argued that government intervention might be necessary to stimulate demand and address the issues arising from sticky wages.

Review Questions

• How do sticky wages contribute to the unemployment problems highlighted by John Maynard Keynes?
  • Sticky wages can lead to prolonged unemployment because they prevent firms from adjusting wage levels downward in response to decreased demand. According to Keynes, this rigidity in wages means that even when there are more workers available than jobs, employers may choose not to reduce salaries to attract more customers or increase hiring. As a result, many workers remain unemployed for extended periods, which is counterproductive to economic recovery.
• Discuss the implications of sticky wages on the labor market and overall economic stability.
  • Sticky wages create challenges in the labor market by preventing quick adjustments that would normally help balance supply and demand. When employers cannot lower wages during economic downturns, it leads to higher unemployment rates, which can spiral into lower consumer spending and further economic decline. This rigidity disrupts economic stability as it hinders the natural corrective mechanisms that might otherwise restore equilibrium in the labor market.
• Evaluate the necessity of government intervention in addressing the issues related to sticky wages in light of Keynesian economics.
  • In the context of Keynesian economics, government intervention is often deemed necessary to address the problems posed by sticky wages. Keynes argued that when markets fail to self-correct due to wage rigidity, active fiscal policies such as increased government spending or tax cuts can stimulate demand. By boosting overall economic activity, these interventions can help mitigate unemployment caused by sticky wages, facilitating a more effective recovery from recessions and promoting long-term economic stability.

Related terms

Nominal wages: The amount of money paid to workers without adjusting for inflation, representing the actual cash compensation received.

Unemployment: The state of being jobless and actively seeking employment, often used as an indicator of economic health.

Labor market: The marketplace where labor is exchanged for wages, influenced by supply and demand for workers and jobs.