Question

Sticky Wages are an important cause of Structural Unemployment. Do you agree or disagree? Mention all reasons for Sticky wages. Describe any one reason of sticky wages in detail. (4-5 LINES) (GRAPH IS MANDATORY)

Answer 1

Sticky wages or wage rigidities occur when worker's wages do not adjust to the simultaneously with the changes in the labor market conditions causing structural unemployment as labor supply being greater than labor demand. Wage rigidity implies that the labor market does not reach a natural level of unemployment. Wages are sticky due to three major factors as follows;

a) Minimum wage laws which imply that some workers are paid more than marginal product of labor would supply more labor and cause oversupply and create unemployment.

b) Unions are associations of workers in firms which represent the power of workers to set wages above marginal product of labor causing structural unemployment.

c) Efficiency wages incentivize manager of firms to set wages higher than marginal product of labor so that workers increase their productivity at work and reduce costs associated with turnover or replacement of workers.