What is the Sticky Wage Theory?

What is the Sticky Wage Theory?

Sticky wage theory argues that employee pay is resistant to decline even under deteriorating economic conditions. This is because workers will fight against a reduction in pay, and so a firm will seek to reduce costs elsewhere, including via layoffs, if profitability falls.

What is meant by the sticky wage theory quizlet?

The sticky-wage theory states that nominal wages do not adjust immediately to changes in the price level, so a lower price level makes employment and production less profitable; therefore, firms reduce the quantity of goods and services they supply.

What is the effect of sticky wages on jobs and costs of production?

Under sticky wages, if firms ask more of their existing workers, this lowers the marginal value of adding labor, lowering vacancies and hiring. By moving the economy along a downward sloping aggregate labor demand schedule, higher effort by current workers reduces demand for new hires.

What is misperception theory?

According to the misperceptions theory, an unexpected fall in the price level leads suppliers to mistakenly believe that their relative prices have fallen, which induces them to reduce production.

Which of these theories has been proposed to explain the upward slope of the short-run aggregate supply curve?

The three theories proposed to explain this upward slope are the sticky wage theory, the sticky price theory, and the misperceptions theory. The short-run aggregate-supply curve shifts in response to changes in the expected price level and to anything that shifts the long-run aggregate supply curve.

When wages are sticky in the short-run the firm’s short-run aggregate supply curve is quizlet?

Terms in this set (6) -The short run AS curve is upward sloping because resource prices, particularly nominal wages, are “sticky.” that means that when the aggregate price level rises, nominal wages rise more slowly. THis allows producers to earn more profit per unit so output rises.

What are the main points of Keynesian theory?

Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries).

What are the two main ideas of Keynesian economics?

Keynesian economics is based on two main ideas: (1) aggregate demand is more likely than aggregate supply to be the primary cause of a short-run economic event like a recession; (2) wages and prices can be sticky, and so, in an economic downturn, unemployment can result.

How does sticky wages connect with unemployment in economy?

During an economic downturn, demand for labor tends to fall, yet wages remain the same. Instead of falling to equilibrium, wages tend to remain sticky. Since wages are sticky, corporations are hesitant to cut wages. Instead, many corporations will choose to lay off employees, resulting in unemployment.

What is worker-misperception model?

In the worker-misperception model, the labour market can reach equilibrium, however, workers suffer from ‘money illusion’. This means that while firms know the price level with certainty, workers temporarily mistake nominal changes in wages for real changes.

What is the relationship between inflation and unemployment in the long run?

Historically, inflation and unemployment have maintained an inverse relationship, as represented by the Phillips curve. Low levels of unemployment correspond with higher inflation, while high unemployment corresponds with lower inflation and even deflation.

Which of the following would cause an economy’s aggregate demand curve to shift to the right?

The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demandconsumption spending, investment spending, government spending, and spending on exports minus importsrise.

What are sticky prices quizlet?

What do we mean by sticky prices? We mean lack of full wage and price flexibility cause output to be determined by demand in the short run.

Which of the following are factors that increase short-run price stickiness?

which of the following are factors that increase short-run price stickiness? firms- fear of price wars. consumers preferring stable and predictable prices. which of the following are examples of financial investment?

Sticky Wages


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