Question

According to Sir John Maynard Keynes what factors explain as to why wages and prices are inflexible or sticky in the downward direction?

Answer 1

Sticky wages means wages gets stuck and to fail just downwards forestalling the recovery process during a recession.

Sticky price are the prices that are resistant to change .They do not go up or down as soon as demand rises or falls.Neither do they fluctuate as production costs change i.e. at least not as rapidly as other goods do.

Factor explains why wages and price are inflexible in the downward direction : main reason is employers fire employees, rather than cut their wages because they're worried about their employees morale.Low nominal wages can bring low morale, and that can generate low productivity like in the case of money illusion which shows that people get more upset by a cut in their nominal wage sometimes than a cut in their real wage.That matters because a firm often doesn't want to lower nominal wages beaches of worker morale as discussed earlier.But sometimes it is easier just to fire some of the workers and have the low morale leave the building altogether and keep the normal wages constant for the rest and then reassure them that their jobs are secure.

A company may have sticky price because of the high costs involved in changing prices.

Printing new brochures and menus, re- filming TV adverts that mention the price, etc. Cost money.However you may have just finished printing your new menu, and an advertising campaign may be underway.Redoing them would be too expensive.

A common reason for sticky prices, even when it would seem that the logical move would be raise them, are LONG TERM CONTRACTS.