Table of Contents
Reasons for sticky wages Employment contracts. Workers may agree on deals with firms to raise wages by say 3% a year in return for productivity deals. Efficiency wage theories. Minimum wages. Trade unions. Costs of hiring and firing workers. Annual contracts. Deflation and nominal rigidity.
Why are the wages sticky in the short run?
The sticky-wage model of the upward sloping short run aggregate supply curve is based on the labor market. In many industries, short run wages are set by contracts. Given that wages are sticky, the chain of events leading from an increase in the price level to an increase in output is fairly straightforward.
What are inflexible wages?
Wages above the equilibrium If unions are strong and powerful, wages are less likely to be flexible and wages could be maintained at W2 – this would be an inflexible wage.
Why are wages sticky quizlet?
why do we consider wages to be sticky? an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong.
What causes wage rigidity?
Survey respondents indicate that labour union contracts and implicit contracts are important reasons for wage rigidity for the (less) skilled. Specific human capital and negative signals for new hires are causes of the stickiness of wages for the highly skilled.
What does it mean if prices are sticky?
By “sticky” prices, we mean the observation that some sellers set prices in nominal terms that do not adjust quickly in response to changes in the aggregate price level or to changes in economic conditions more generally.
Why are some prices sticky?
A price is said to be sticky-up if it can move down rather easily but will only move up with pronounced effort. When the market-clearing price implied by new circumstances rises, the observed market price remains artificially lower than the new market-clearing level, resulting in excess demand or scarcity.
What is a nominal wage?
: wages measured in money as distinct from actual purchasing power.
Are wages sticky in the long run?
Whatever the nature of your agreement, your wage is “stuck” over the period of the agreement. Your wage is an example of a sticky price. One reason workers and firms may be willing to accept long-term nominal wage contracts is that negotiating a contract is a costly process.
What is price wage rigidity?
In macroeconomics, rigidities are real prices and wages that fail to adjust to the level indicated by equilibrium or if something holds one price or wage fixed to a relative value of another.
What does it mean for prices to be sticky quizlet?
sticky prices. Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded. great depression.
Which of the following economic events will shift the long run aggregate supply curve?
Which of the following events will shift the long-run aggregate supply curve? A shift in the production function will shift the long-run aggregate supply curve.
Which of the following is an example of cyclical unemployment quizlet?
The loss of construction jobs during the 2008 housing financial crisis is an example of cyclical unemployment.
What does it mean by the downward wage rigidity?
Downward nominal wage rigidity (DNWR) is defined on the basis of the frequency of nominal wage freezes. Firms freezing nominal base wages at any point during the five-year period prior to the survey are considered to be subject to nominal wage rigidity.
Do labor unions contribute to wage rigidity?
In contrast to conventional wisdom, it turns out that collective bargaining does not cause downward wage rigidity in times of rising unemployment.
How can wage rigidity explain unemployment?
In an economy with a predetermined nominal money supply, the per- sistence of unemployment derives from the rigidity of nominal wages- that is, in times of high unemployment, a reduction in money wages would restore full employment.
Are sticky prices good?
From a pure efficiency standpoint, sticky prices are an abomination, because holding an inefficient price results in deadweight loss since the market suggests there is another optimal price to maximize consumer and producer surplus.
How do sticky prices affect output?
When prices are sticky, the SRAS curve will slope upward. The SRAS curve shows that a higher price level leads to more output. There are two important things to note about SRAS. For one, it represents a short-run relationship between price level and output supplied.
What did Keynes mean when he said that prices are sticky?
What did Keynes mean when he said that prices are sticky? Prices, especially the price of labor, are inflexible downward.
Can sticky prices be adjusted?
The ‘stickiness’ of prices. When supply and demand drift apart, prices adjust to restore equilibrium. But when prices cannot adjust, or can only adjust slowly, there is an inefficiency in the market.
What is sticky wage model?
What Is the Sticky Wage Theory? The sticky wage theory hypothesizes that employee pay tends to respond slowly to changes in company performance or to the economy. Specifically, wages are often said to be sticky-down, meaning that they can move up easily but move down only with difficulty.
What is the difference between sticky prices and flexible prices?
Flexible-priced items (like gasoline) are free to adjust quickly to changing market conditions, while sticky-priced items (like prices at the laundromat) are subject to some impediment or cost that causes them to change prices infrequently.
What is nominal wage vs real wage?
The nominal wage rate is the average hourly wage rate measured in current dollars and the real wage rate is the average hourly wage rate measured in dollars of a given reference base year.
Is money wage and nominal wage same?
Nominal wage, or money wage, is the literal amount of money you get paid per hour or by salary.
What is the nominal minimum wage?
That said, the current minimum wage is $7.25, so the federal minimum wage has increased faster than the rate of inflation since its inception. We call the wage in dollars the nominal wage. It is not the most useful measure of the amount that workers are receiving.
Do sticky wages and prices make it more difficult for the economy to come out of recession?
Since wages are slow to adjust to changing market conditions, it results in disequilibrium in the labor market. In a recession, the demand for goods decreases, reducing the demand for production and labor. Therefore, when wages are sticky in a low inflation environment, economic recovery tends to be slower.
