Question

The Krisp Kracker company which makes unique kettle chips for restaurants, clubs, and events, has just lost a large client that made up 55% of its total revenue. Management finds it necessary to reduce staff or wages. This comes only three months after hiring 35 new people to support this big client. While there are rumors of wage reductions in the short run, the 100 employees who have been with the company for the past two years are grumbling that they are more valuable that the new hires which should be let go and the wages not reduced. The situation at Krisp Kracker illustrates which wage stickiness theory best?

Answer 1

The given case defines the current situation of Krisp Kracker company which has lost one of its major consumers who contributed 55% of its total revenue. The stats of the company also confirm that 35 people were recruited recently to cater to this consumer alone. The company also encompasses almost 100 workers who have been with the company for the past two years and with the increasing tensions of staff reduction, hoping for retainment of them over the new recruits.

                                    The sticky wage theory states that the wages of the employees would have a slow response to the performance of a company. Thus, wages are assumed to be sticky-down which means that it is easier for the wage patterns to increase, but difficult for reductions. The presence of long-tern contracts and unionism are expected to be the major causes for the stickiness of wages. The response of these wage patterns in the upward slope rather than the downward slope is otherwise called as the ‘Ratchet effect’. The effect says that stickiness of wages would result in stagnant wages and reduced employment opportunities rather than reduction of the wages.

                                    In the given case, due to loss of a major consumer, the revenue generation of the company is expected to fall. The loss of major consumer would also mean that the production levels have to be lowered which in turn requires lesser work force. Since 35 new employees are recruited for the purpose of catering to the needs of the major consumer, the fall out of the consumer would mean that these new employees are no longer required to be the part of the firm. Moreover, the wages of the long-term employees could not be cut short as that have been a part of the firm to cater to all the consumers of the firm. Thus in this current situation, although the company has two options, either for a mass salary reduction or for pull-out of new recruits, the company is expected to follow the latter as the production requirements have fallen and the work force requirements are lesser. Thus, it would be following this Keynesian wage stickiness model.