What is the meaning of sticky wages Provide and explain thre

What is the meaning of \"sticky\" wages? Provide and explain three reasons why wages may be sticky.

Solution

Sticky wages means pay of employed workers tends to have a slow response to the changes of economic condition. According to sticky wage theory, with an increase in unemployment, the wages of employed workers tend to stay same or grow at a smaller rate, rather than decrease with fall in demand for labor.

3 reasons why wages may be sticky

1) Imperfect information- In the short run workers do not realize that an increase in the nominal wages for an increase in the prices. That leads to increase output and decrease in unemployment. Slow adjustment of wages because of slow reaction of workers or for imperfect information.

2) Coordination problem- If only one firm increases price and other firms do not increase price then that one firm will make a loss in the market. But if all firms increase prices together in the same proportion, they can move to the new equilibrium. For coordination failure, each firm raises the firm slowly. according to this coordination problem, if one firm cut wages due to a decrease in demand for goods, while other firms do not, then the worker of that firm leave the firm. But if firms coordinate then they can cut wages together. Wages go down slowly because of coordination failure.

3) Efficiency wages and cost of price changes- Efficient wage theory explains wages motivated workers to work hard. firms may pay above the market clearing wages to ensure hard work from its workers and stick to their firm.