Wages have been slowly increasing in most areas. However, this increase has not followed other economic factors, such as inflation. Employees always want their wages to rise. However, employers may not share the same view.
Wages also play a crucial role in the economy. However, governments rarely interject in the matter. They may introduce policies such as minimum wages. Though, they may not be sufficient.
Similarly, prices of goods or services change often in the market. However, there may be some resistance to any external changes.
Although economic shifts may justify a fluctuation in price, this resistance can impact how it alters.
Most sellers may not prefer changing their prices due to the adverse consequences. This theory may apply even if the demand for the underlying goods or services varies.
Overall, the stagnation of wages and prices is critical to an economy. Most participants within an economy want to understand how this process works.
Economists depict it as sticky wages and prices. Similarly, some theories within economics can describe how this process works. Before that, it is crucial to understand what sticky wages and prices mean.
What are Sticky Wages and Price in Economics?
Economists describe sticky wages and prices in economics under the sticky-down concept. It represents the likelihood of the price of goods and services to move up without significant resistance.
However, these prices often don’t follow the same process when falling. Essentially, stick wages and prices in economics refer to these items going up smoothly. However, they don’t come down at the same rate.
Primarily, stick wages and prices refer to the resistance of these items to change. These changes come from the economy and its components.
Usually, sticky wages and prices occur due to market imperfections. Furthermore, market distortions can also impact the ability of wages to go up and prices to go down. Other factors, such as maximizing profits, also contribute to these areas.
Sticky wages and prices include two areas. However, they usually get impacted by the same parties. In most cases, the producers within an economy affect them.
These parties prefer to maximize their profits. Consequently, they stick to the wages offered to employees. Therefore, those wages remain sticky.
On the other hand, they don’t decrease their prices either. It also impacts the price stickiness in any economy.
Sticky wages and prices can impact an economy adversely. It also goes against the laws of supply and demand in economics.
Essentially, these laws show the relationship between demand and supply. In economics, if one element fails, the other rises.
However, when producers stick to their prices, they ignore these laws. Even if the demand for the products or services falls, they do not reduce the price.
Sticky wages and prices refer to the resistance these items illustrate to changes. However, both areas follow a different approach to it.
In economics, studying these areas is crucial in understanding how the economy gets impacted by that behaviour. Sticky wages and prices also go against various economic beliefs. Essentially, theoretical economics suggests that these items should fluctuate with changes in the economy.
However, sticky wages and prices do not follow that belief. Regardless of the economic situation, sticky wages and prices remain fixed.
Therefore, they fail to respond to any fluctuations in the market. This behaviour can harm the economy. This impact can be significantly higher in specific economic conditions, for example, a recession.
What is the Sticky Wage Theory?
The sticky wage theory describes the behaviour of wages in various economic conditions. It shows how wages fail to adjust to the changes in labour market conditions. Essentially, this theory suggests that wages do not respond to those conditions as they should.
However, wages also differ from other markets. There, the primary economic factors impacting prices are supply and demand. The same does not apply to wages.
Wages usually remain the same or above equilibrium. The sticky wage theory suggests that employee pay may still respond to changes in economic conditions.
However, this response is slower compared to those changes. On top of that, employer performance should also impact wages in theory. However, it fails to have the same impact as it should give optimal economic conditions.
The sticky wage theory also relates to employment and unemployment. It suggests that workers’ wages remain the same or grow slower.
However, they do not fall when there is a decrease in labour demand. This condition occurs when the unemployment rate in an economy rises. The sticky wage theory explains how wages do not respond the same way to a decrease in demand as expected.
The sticky wage theory comes from the work of John Maynard Keynes. More specifically, it relates to his nominal rigidity concept.
This theory also suggests the reasons wages are sticky. These may include employees’ willingness to accept raises, unions, bargaining power, etc.
Wage stickiness is a crucial concept in economics. Without this theory, wages will adjust to changes in labour market conditions.
Sticky wages can fall into two types. The first involves a sticky up wage situation. In this case, wages can go down easily but don’t show the same tendency when moving up.
On the other hand, the sticky down type is the opposite. In this type, wages can go up smoothly but resist a downward change. Practically, the latter type is more common. The sticky wage theory describes and explains both situations.
What are Sticky Prices?
Sticky prices relate to the resistance that market prices illustrate to specific changes. It describes how these prices do not fluctuate smoothly despite economic conditions suggesting otherwise.
Similarly, it is called price stickiness which describes the same phenomenon. In economics, sticky prices refer to the tendency of market prices to remain fixed despite shifts in economic conditions.
Sticky prices occur when the prices of goods or services do not change despite fluctuating demands. Like sticky wages, these prices do not follow the laws of supply and demand. Theoretically, market prices should fall when demand decreases.
They should rise with an increase in that demand. However, sticky prices do not change despite fluctuations in market demand.
Several forces can impact sticky prices. Primarily, these include the costs involved to update the pricing. Most producers consider how decreasing their prices can impact their profits.
Usually, these prices going down harms the income earned by those produces. Therefore, they are unwilling to change their prices despite the fluctuations in market demand.
The underlying factors to why prices remain sticky may fall under three categories. Firstly, it may exist due to imperfect information in the market.
Similarly, lack of competition also causes sticky prices. It further explains why prices don’t change in monopolistic sectors. Lastly, heavy regulations also impact prices and force them to stay fixed over several periods.
Sticky prices are the opposite of flexible prices. The latter occurs when prices change due to several reasons. Although it makes more sense for producers to use it, they still stick to sticky prices due to the costs associated with the latter.
Sticky prices come from the same underlying concept of nominal rigidity in economics. They impact different areas with similar approaches.
Economics suggests that market conditions can impact the wages and prices within an economy. Usually, supply and demand play a crucial role in it. However, when these items become sticky, they don’t follow the same rules.
Sticky wages and prices occur when these areas don’t respond to market changes as they should. These correspond to the sticky wage theory and price stickiness concepts in economics.