MacroeconomicsI_working_version (1)

Labour Market, Unemployment 83
Wage rigidity (wage stickiness). Wages are rigid, or sticky, when the wage adjustment
ensuring full employment is slow over time.
Let’s explain some reasons for wage stickiness.
• Collective bargaining: Insider-outsider model. Labour (or trade union) are
employees’ organisations, which advocate interests of labour in a number of
dimensions, most importantly, wages. However, the unemployed do not sit at the
bargaining table. “While the unemployed would prefer firms to cut wages and create
more jobs, firms effectively negotiate with the workers who have jobs, not with people
who are unemployed. That has an immediate implication. It is costly to firms to turn
over their labour force – firing cost, hiring costs, training costs – and, as a result,
insiders have an advantage over outsiders. More important, threatening insiders that
they will be unemployed unless they accept wage cuts is not very effective. People who
are threatened may have to give in, but they will respond poorly in terms of their
morale, effort, and productivity. It is far better to reach a deal with the insiders and pay
them good wages even if there are unemployed workers who would be eager to work
for less.” 2
The insider-outsider model suggests that wages will not adjust unemployment
considerably, and hence give a reason why economy remains longer in recession and do
not return quickly to its full employment level.
• Social minima. Social minima represent the minimum standards for income and
earnings set by government because of social equity protection. Minimum wages
establish the lowest level below which wages may not fall. This contributes to wage
rigidity, and thus, involuntary unemployment.
• Efficiency wages. According to efficiency wage theory, firms consider wages a means
of motivating labour. The amount of effort workers make in work corresponds to how
well the job is paid comparing to alternatives. Firms may be willing to pay wages above
the market-clearing wage to ensure that employees work hard enough to avoid losing
their good position.
• Imperfect Information – Market Clearing. The imperfect information models
consider wages as fully flexible. However, their adjustment is slow because of
temporarily wrong expectations. Slow adjustment of wages originates from imperfect
information about changing price-level and slow reaction of workers.
2 Explanation of Insider-Outsider model from Dornbush-Fisher-Starz [7]; to explore more about this model see
Lindbeck, A. - Snower, D.: Wage setting, Unemployment and Insider-outsider relations. American Economic
Review, 76. 1986, p. 235-9.