Question

One of the major problems in Latin America in the 1980s was according to some economists, the wager igidity. The wages were not falling down fast enough when economic conditions were demanding such a fall according to those economists. What could be a remedy those economists might have suggested to
decrease the wage rigidity?

Answer 1

Q. One of the major problems in Latin America in the 1980s was according to some economists, the wage rigidity. The wages were not falling down fast enough when economic conditions were demanding such a fall according to those economists. What could be a remedy those economists might have suggested to decrease the wage rigidity?

The wage rigidity means wage does not change or failure of wages to adjust to a level at which labour demanded equals to labour supplied in an economy. It is inevitable that in the product and money market few disturbances would affect the economy from time to time or might be sporadically. This is directly or indirectly usually affects to the macro variables existing in the market. It is not commendable for the economy to have the cyclical phases where it comes through experiencing wage rigidity in the market because it badly affects the labour market as well as the economy as a whole due to its stagnant feature.

The following are the remedy that might have suggested by the economists to decrease the wage rigidity in the 1980s;

Existence of Contractual labour market: In a contractual labour market, wages are not market determined. It is determined through a bargaining process. Hence, the static changes that occur in the market cannot affect the wage rate directly. To mitigate the problem contractual labour market, proper labour policy should be brought into the labour market, which address the problem of contractual or pre-determined wage rate and replace this regime by bringing the mechanism of wage determination on the basis of market forces.   

Broadly workers are interested in their absolute as well as relative wages when they work in the market. The absolute wage is what they receive in terms of money and relative wage is workers absolute wage vis-a-vis absolute wages of workers with similar skills, education etc. While wage bargaining, both unions and employers recognise the need for relative parity in wage rate structure. These results in wages do not fall even when there is an immediate fall or rise in demand and supply of labour. Therefore, economists might have suggested to go for market determined mechanism rather than any sort of contract made prior to the initiation of production. Except that downward movement of wages turn down by the workers and an upward movement of the wages turn down by the employers. So this power should be handed over to the market to decide accordingly what the situation demands.

These are the possible suggestion might have given by the economists to mitigate the problem of wage rigidity in the market.