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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

I want Keynes clear example of critics on Long run , please!!
AA Reply
what study of macro economic..?
Yogini Reply
macroeconomics can be defined as a branch of economics that studies the structure and principles governing an economy(national,regional or global) rather than individual markets
What is say's law of marketing?
goods once sold can't be returned
but thats not true at all goods are returned all the time
yah ur right, as a buyer, But in the marketing world, once a good is sold, its sold.
thanks @marvin
what study of macro economic ..?
what does this saying in economics means "there is no such thing as a free lunch pls
Saibu Reply
autonomous consumption
consumption that is not related to level of income u hve.. eg consumption of basic necessities.
autonomous consumption is the consumption when income is zero or expenditure is not vary from income
what is investment function?
what is the relationship between demand and supply?
According to ijmb marking guide, Differentiate between capital expenditure and revenue expenditure.
elemi Reply
Sir please provide me notes on :-unemployment-the trade-off between inflation and unemployment
Swikrit Reply
what is income
reward for rendering a sercive the real income is after a taxt y-t = (y)
what are the components of trade?
Michelle Reply
whats is gdp
odell Reply
what is gdp per capita
GDP of state divided by its population: GDP per capita. it is one of the most relevant indicator of prosperity among its citizens.
which one is more advantageous or accurate to the other between GDP and GNP?
Both, GDP measures only the incomes generated within the country, irrespective of ownership. whereas,GNP measures the total income earned by nationals.
but which one is a better measure
what are supernormal profits
Caroline Reply
what are zero economic profits
under what circumstances may a firm continue operating even when it is making losses
why should government influence location of a firm
using an illustration,distinguish between breakeven and shutdown point of a firm
supernormal profits are profits beyond the normal profits a firm expects to have after the sale of all goods n services it produced
what are the differences between choice and scarcity
Primus Reply
what is the difference between choice and scarcity
choice means we have many options scarcity means limitation within the same option we chose among choices.
what the d/f production efficeincy and out put efficeincy
what is money?
Primus Reply
money is the material which used to exchange to buy or sell
What is the law of large numbers
Nana Reply
Can anybody provide Solow Growth Model?
Sakar Reply
compare and contrast the classical view and the Keynesian view of economic growth
idoko Reply
long and short term run

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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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