Answer to Question #302871 in Macroeconomics for shahi

Question

What are some of the factors that cause wages to be inflexible (not change very easily and rapidly)?

 

 

Answer 1

I).Employment contracts. Workers might also agree on offers with firms to raise wages by way of say 3% a year in return for productiveness deals. If there is a fall in demand for labour (due to recession or fall in recognition of product), the firm may additionally be caught with the employment contract and be unable to reduce wages at least in the short-term.

ii).Efficiency wage theories. This is an argument that paying a greater wage increases people morale, loyalty and willingness to work hard. A reduce in wages is a psychological blow, which will critically decrease labour morale and productivity. Therefore, the firm can also sense that the fee financial savings of lower wages will be offset by means of a fall in productivity.

III).Minimum wages. A association may face a legal minimal wage and be unable to cut wages under the country wide statutory minimal wage.

Iv).Trade unions. Trade unions will withstand wage cuts. Also, they are more probably to be worried about the pay of those in work, than those who are unemployed and now not in a exchange union. The unemployed might also be willing to work at lower wages, but these ‘insiders’ who are employed don’t prefer to see wage cuts.

V).Costs of hiring and firing workers. Labour is not the identical form of commodity as buing inputs of raw material. Once a worker is trained and used to working, a manager will try to keep away from the emotion of sacking a employee or cutting wages due to the fact of the human expenses involved.

Vi).Annual contracts. Wages are frequently set a 12 months at a time. therefore, at least in the short-term, wages are fixed and inflexible. In the long-term, wages may also be greater flexible.

Vii).Deflation and nominal rigidity. In a period of deflation or very low inflation, wages are more probable to be ‘sticky.