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Why wages might be sticky downward

If a labor market model with flexible wages does not describe unemployment very well—because it predicts that anyone willing to work at the going wage can always find a job—then it may prove useful to consider economic models in which wages are not flexible or adjust only very slowly. In particular, even though wage increases may occur with relative ease, wage decreases are few and far between.

One set of reasons why wages may be “sticky downward,” as economists put it, involves economic laws and institutions. For low-skilled workers being paid the minimum wage    , it is illegal to reduce their wages. For union workers operating under a multiyear contract with a company, wage cuts might violate the contract and create a labor dispute or a strike. However, minimum wages and union contracts are not a sufficient reason why wages would be sticky downward for the U.S. economy as a whole. After all, out of the 150 million or so workers in the U.S. economy, only about 1.4 million—less than 2% of the total—are paid the minimum wage. Similarly, only about 12% of American wage and salary workers are represented by a labor union. In other high-income countries, more workers may have their wages determined by unions or the minimum wage may be set at a level that applies to a larger share of workers. But for the United States, these two factors combined affect only about one-fifth or less of the labor force.

Economists looking for reasons why wages might be sticky downwards have focused on factors that may characterize most labor relationships in the economy, not just a few. A number of different theories have been proposed, but they share a common tone.

One argument is that even employees who are not union members often work under an implicit contract    , which is 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. This wage-setting behavior acts like a form of insurance: the employee has some protection against wage declines in bad times, but pays for that protection with lower wages in good times. Clearly, this sort of implicit contract means that firms will be hesitant to cut wages, lest workers feel betrayed and work less hard or even leave the firm.

Efficiency wage theory argues that the productivity of workers depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. One reason is that employees who are paid better than others will be more productive because they recognize that if they were to lose their current jobs, they would suffer a decline in salary. As a result, they are motivated to work harder and to stay with the current employer. In addition, employers know that it is costly and time-consuming to hire and train new employees, so they would prefer to pay workers a little extra now rather than to lose them and have to hire and train new workers. Thus, by avoiding wage cuts, the employer minimizes costs of training and hiring new workers, and reaps the benefits of well-motivated employees.

Questions & Answers

what is macroeconomics
Dickison Reply
what is macroeconomics
Majid Reply
what is macroeconomic analysis
Deogratius Reply
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment Read m
wasay
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment
wasay
what is economic
Wajeed Reply
Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. 
ninad
what is inflation
Junaid Reply
Inflation is simply a situation in an economy where there is a persistent rise or increase in the prices of goods and services in a particular year(say current year)
JERRY
It can still be defined as a situation in an economy where there's a persistent fall in the value of money
JERRY
it is the persistent rise in the general price of goods and services in an economy leading to the fall in the values of money
Muafue
It could mean the central bank has a deficit in reserve unable to cope with low export and exit of foreign investments.
Wong
what is willingness
Bilal Reply
Is a person Able,Capable and Anxious to something
Muafue
Is when a person is able,capable and Anxious to do something
Muafue
thanks sir g.
Bilal
u are welcome
Muafue
where you from
Bilal
Cameroon
Muafue
And you
Muafue
Pakistan
Bilal
How far are you in Education
Muafue
who about my question What is MPC
sabawoon
is marginal propensity to consume
Muafue
a little more
sabawoon
sorry muafue sir you are little bit wrong about willingness *willingness reffers how much wants . it could be wants for payment or wants for something to do.
Masadaq
MPC reffers *How much want to consume*.
Masadaq
MPC is Marginal Propensity to Consume. MPC is proportion of additional spent on consumption.
Bon
MPC is Marginal Propensity to Consume. MPC is the proportion of additional income spent on consumption.
Bon
What is difference between GNP and GDP?
Zahid
GNP is gross national product. In calculating GNP we include net national income from abroad while GDP is gross domestic product and in calculating it we use on expenditure, income and output from within the country. My name is JERRY NGONDA from Cameron
JERRY
GNP.the total value of good $service currently produce w a given period of time by domestic owner GNP=NFI+GDP:GDP is a market value of final good $service currently produce in a given period of time w in a country boundery or territors.its take produce currently $etc
tade
yes.no suggestions
tade
good Tade Feyera
Masadaq
Tade Feyera can you send me your whatsap contact number.
Masadaq
when spending by the federal government exceeds net taxes?
stefany Reply
unemployed means people are not in the labor force, who have no job, are actively looking for job, they might be return to workforce.
tiffany Reply
the number of unemployed worker out of total number of people in workforce times 100
tiffany
Explain the necessity of studying macroeconomics.
mrinmoyee Reply
how is DDP calculated
sheikh Reply
the question is not understood
Muafue
when demand curve change
Manoj Reply
Due to unemployment rate change for example
amr
Due to external environments change
amr
Due to increase country GDP and 8ncome
amr
Due to tax rate change
amr
substitution effects government policy change in incomes
Alhassan
thanxx
Manoj
curve of demand which type?
Manoj
what is the diagram of demand curve
Manoj
when demand curve is change
Manoj Reply
Due to many reasons
amr
which type reason
Manoj
what is Economic
Tech Reply
What.. You say
TRAVELLING
what u mean by liquidity trap
Athirai Reply
define double counting
Athirai
What is the Cobb-Douglas production function about?
Dorothy Reply
The Cobb Douglas production function is a particular functional form of production,widely used to represent the technological relationship between the amount of two or more inputs and the amount of outputs that can be produced by those inputs.
Muafue
how do produce
Mohit
for whom to produce
Mohit

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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