Sticky wages refer to a situation in labor markets where wage rates are inflexible and do not readily change in response to fluctuations in market conditions. This inflexibility can be seen both in terms of nominal wage resistance (unwillingness to accept lower money wages) and real wage resistance (unwillingness to accept wage increases that are less than the rate of inflation).
Historical Context
The concept of sticky wages has been discussed since the early 20th century, notably in the context of Keynesian economics. John Maynard Keynes highlighted the phenomenon in his work “The General Theory of Employment, Interest and Money” (1936), where he argued that sticky wages could lead to unemployment and underutilization of resources during economic downturns.
Types/Categories
- Nominal Wage Stickiness: Resistance to changes in the actual amount of money paid to workers.
- Real Wage Stickiness: Resistance to changes in wages relative to the cost of living, accounting for inflation.
- Downward Wage Stickiness: The tendency for wages to be less flexible downwards compared to upwards.
- Upward Wage Stickiness: Less common, this involves resistance to wage increases, often due to temporary labor shortages or union negotiations.
Key Events
- The Great Depression: Highlighted by Keynes, the Great Depression saw extensive unemployment partially attributed to wage stickiness.
- Post-World War II Economic Expansion: Unions and collective bargaining became more prevalent, adding to wage stickiness through negotiated wage floors.
- Financial Crises and Recessions: Each economic downturn, including the 2008 financial crisis, has demonstrated aspects of sticky wages in prolonging unemployment.
Detailed Explanations
Mathematical Model
The concept of sticky wages can be represented using the supply and demand model for labor. When the demand for labor decreases due to an economic downturn, wages should theoretically fall to reach a new equilibrium. However, due to stickiness, wages remain the same, leading to excess supply (unemployment).
Mermaid Diagram
graph LR
A[Labor Market] --> B[Demand for Labor Decreases]
B --> C{Wage Stickiness}
C -->|Nominal Stickiness| D[Wages Don't Decrease]
C -->|Real Stickiness| D[Wages Don't Increase with Inflation]
D --> E[Excess Labor Supply]
E --> F[Unemployment]
Importance and Applicability
Understanding sticky wages is crucial for economists and policymakers because it affects employment, inflation, and economic stability. For businesses, recognizing wage stickiness can influence hiring and salary practices, particularly during economic fluctuations.
Examples and Considerations
Examples:
- During a recession, companies may lay off employees instead of cutting wages to avoid morale issues.
- Trade unions negotiating for fixed wage contracts contribute to stickiness.
Considerations:
- Wage stickiness can delay economic recovery.
- Policies such as minimum wage laws, labor contracts, and inflation indexing can exacerbate or mitigate sticky wages.
Related Terms
- Nominal Wage: The actual amount of money paid to workers.
- Real Wage: The purchasing power of the nominal wage, adjusted for inflation.
- Labor Supply and Demand: The availability of workers and the need for their labor.
Comparisons
- Flexible Wages vs. Sticky Wages: Flexible wages adjust quickly to market conditions, while sticky wages remain unchanged.
- Market-Clearing Wages vs. Sticky Wages: Market-clearing wages align with supply and demand equilibrium, whereas sticky wages cause imbalances.
Interesting Facts
- Sticky wages can lead to what economists call “wage rigidity,” preventing the labor market from clearing efficiently.
- Some industries experience more wage stickiness than others, often due to union presence and regulation.
Famous Quotes
- “Wages are sticky. We economists used to joke that people would accept a 5 percent cut in the real value of their wages more readily than a 2 percent cut in the nominal value.” - Paul Krugman
FAQs
What causes sticky wages?
How do sticky wages impact the economy?
References
- Keynes, John Maynard. “The General Theory of Employment, Interest, and Money.” 1936.
- Blanchard, Olivier. “Macroeconomics.” Pearson Education, 2017.
- Krugman, Paul. “End This Depression Now!” W. W. Norton & Company, 2012.
Summary
Sticky wages, characterized by their resistance to change in response to market conditions, play a significant role in labor economics. Understanding the mechanisms behind wage stickiness and its impacts can aid in designing effective economic policies and business strategies to better navigate labor market challenges.
