JavaScript is disabled for your browser. Some features of this site may not work without it.
  • About K
  • Academics
  • Admission
  • Alumni Relations
  • Giving to K
  • News & Events
  • Student Life
  • HORNET HIVE
  • ATHLETICS
  • SITEMAP
  • WEBMAIL
    • Login
    View Item 
    •   CACHE Homepage
    • Academic Departments, Programs, and SIPs
    • Economics and Business
    • Economics and Business Senior Individualized Projects
    • View Item
    •   CACHE Homepage
    • Academic Departments, Programs, and SIPs
    • Economics and Business
    • Economics and Business Senior Individualized Projects
    • View Item

    The Existence of Sticky Wages in the Labor Market

    Thumbnail
    View/Open
    Searchable PDF / Kalamazoo College Only (736.0Kb)
    Date
    1999
    Author
    McGuire, Andrew J.
    Metadata
    Show full item record
    Abstract
    This essay will analyze, according to Neo-Classical and New Keynesian economic theory, the wage rigidities in the labor market and the role of labor unions. This line of research emerged following recent experiences in the labor force during the winter and summer of 1999. Neo-Classical economists believe in the price mechanism and flexible wages. The price mechanism is a device said to bring the economy back to full employment and to the equilibrium wage. In this analysis, wages are not sticky and allow the price mechanism to raise or lower the wage level in order to achieve equilibrium, adjusting to either excess demand or excess supply in the labor market. In the real world, however, we observe that wages are anything but flexible. New Keynesians seek to develop models that explain the inflexibility, or stickiness, of wages. Among the several reasons why wages are sticky, New Keynesians explain that there are non-contractual relationships between workers and employers that keep the wage higher than the equilibrium wage rate. These social contracts are in effect, insurance policies for the workers, in return for their loyalty to the firm. Another model is the idea of efficiency wages, wages that are set above the equilibrium level for the purpose of promoting the increase of morale and productivity among the work force. Efficiency wages also attract the best workers in the labor market to the firm because of the attractive wage level. Having better workers apply will cut down the effects of asymmetric information iv in the labor market, which can lead to increased labor turn over costs. An efficiency wage can also reduce hiring and firing costs, with a high wage level the opportunity cost of a worker losing his/her job increases. This can have a positive effect on productivity and decrease the amount of goofing off('shirking') by workers. New Keynesians though very similar to Neo-Classical economists believe in wage rigidity within the labor market. It is observed that labor unions create sticky wages with the formation of explicit contracts for union members. Explicit contracts set a higher wage for union members and last for up to three years. These contracts hold the wage at a stable level and it cannot be reduced. Contracts are long term because of costly negotiation expenses. With a stable wage rate the wage is observed to be sticky. This analysis explains some of the opposing views of sticky wages in economic theory as well as the effects of labor unions on the wage level in the labor market. Essentially, the New Keynesian model along with the existence of Labor Unions explains the insufficient bases of the Neo-Classical model and that wages remain sticky.
    URI
    http://hdl.handle.net/10920/25798
    Collections
    • Economics and Business Senior Individualized Projects [1146]

    Browse

    All of DSpaceCommunities & CollectionsBy Issue DateAuthorsTitlesSubjectsThis CollectionBy Issue DateAuthorsTitlesSubjects

    My Account

    Login

    DSpace software copyright © 2002-2021  DuraSpace
    DSpace Express is a service operated by 
    Atmire NV
    Logo

    Kalamazoo College
    1200 Academy Street
    Kalamazoo Michigan 49006-3295
    USA
    Info 269-337-7000
    Admission 1-800-253-3602

    About K
    Academics
    Admission
    Alumni Relations
    Giving to K
    News & Events
    Student Life
    Sitemap
    Map & Directions
    Contacts
    Directories
    Nondiscrimination Policy
    Consumer Information
    Official disclaimer
    Search this site


    Academic Calendars
    Apply
    Bookstore
    Crisis Response
    Employment
    Library
    Registrar
    DSpace Express is a service operated by 
    Atmire NV