Sticky wages, labor demand elasticity and rational unemployment

Siyan Chen and Saul Desiderio

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we give a clear-cut explanation to the sluggish wage adjustments which are commonly experienced also in face of involuntary unemployment. We prove that unemployment may be the physiological outcome of rational decisions by competing workers who may find it optimal to ask higher wages than the full-employment ones. The key element driving the result is the slope (or elasticity) of labor demand schedule: in case of rigid labor demand, in fact, workers’ wage requests are kept high because of reduced unemployment opportunity costs. This contrasts with other approaches to the analysis of unemployment, where only the level of labor demand is considered. Impatience of working and effort required by the job are also showed to influence the degree of wage stickiness.

Keywords: Sticky wages; involuntary unemployment; labor demand elasticity; game theory (search for similar items in EconPapers)
JEL-codes: C72 E24 J23 J64 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-lab and nep-mac
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Journal Article: Sticky wages, labour demand elasticity and rational unemployment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53260

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