A Quick Primer on Sticky Wages

A quick primer on the concept of sticky wages - a Keynesian idea - which has become important during the cost of living crisis. Less than 25% of people in work are members of a trade union. Monopsony power is on the rise. Has this made it easier for real wages to fall? Or are persistent labour shortages a factor protecting people in some jobs?

In Keynesian economics, sticky wages refer to the phenomenon where wages do not adjust quickly or easily to changes in economic conditions, particularly in response to decreases in demand. This means that even when unemployment rises and businesses face pressure to reduce costs, they may be reluctant to cut wages due to a variety of factors.

Here are some of the reasons why wages may be sticky:

• Implicit contracts: Employers and employees may have implicit agreements that wages will not be cut, even during downturns. These agreements can be based on factors like fairness, morale, and productivity.
• Menu costs: Changing wages can be expensive and time-consuming for businesses, due to the need to update payroll systems, benefits packages, and other administrative paperwork.
• Efficiency wages: Some economists argue that businesses may pay slightly higher wages than the market equilibrium to increase worker productivity, reduce turnover, and improve morale.
• Worker resistance: Workers may be resistant to wage cuts due to concerns about their living standards and job security. They may also be protected by unions or labor contracts that make it difficult for employers to reduce wages.

Sticky wages can have a number of macroeconomic consequences. For example, they can:

• Slow down economic recovery: If wages don't fall in response to a recession, businesses may be more likely to lay off workers, which can further dampen economic activity.
• Exacerbate unemployment: By making it more difficult for workers to find new jobs, sticky wages can contribute to higher unemployment rates.