Question

1.Policy Topic: We have a recession. What do I need to know about “sticky wages?” Explain the concept Describe and analyze all of the theories cited about why wages might be “sticky.” How do “sticky” wages play a large role in policy effectiveness? How does this concept change the policy approaches of Keynesians and Classicalists?

Answer 1

Sticky wages concept has come from the sticky wage theory that says that wages given to the workers, don’t change fast, according to the economy and labor market scenario. It means that wages will remain fixed and sticky and will slowly change even if economy goes into the recession or labor market has an excess supply of labor. It affects the policy taken up during the time of recession and the authorities have to take the consideration of sticky wages and play an active role. Due to sticky wage, the unemployment rate will increase as workers will not accept lower & flexible wages on a frequent basis. In this regard, the government has to adopt the discretionary fiscal policy and increase the government spending and decrease the tax so that aggregate demand gets a boost and it creates an opportunity for the supply and employees are kept in their employment. Monetary policy also acts to increase the money supply and reduce the interest rate.
Classical approach to the economic scenario, does not accept the sticky wages and it says that when labor supply exceeds the labor demand, then wages will come down and factors of production will also come down. It will reduce the prices and demand will increase at the lower prices. Slowly, the economy will recover on its own and government does not require the active intervention. But, it was not followed by the Keynesian proposal as it accepted the active presence of sticky wages as well as animal spirit of the people to save more during the recession that worsens the economic scenario. So, sticky wages are duly acknowledged in Keynesian approach.