Question

Another reason why that New Keynesian argue that wages are less flexible downward is the idea of an efficiency wage. This is the theory that firms may choose to pay workers a higher wage than what the market would normally dictate to get workers to work hard and have a higher level of productivity. They would argue along with that a cut in wages for all workers would reduce their productivity, because the wage cut would anger workers who would then have less an incentive to be efficient. So firms may view it as more efficient to cut cost by laying off workers instead of cutting wages. What do you think?

Answer 1