Sticky wages, labour demand elasticity and rational unemployment

Saul Desiderio and Siyan Chen
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Siyan Chen: Shantou University

Australian Journal of Labour Economics (AJLE), 2014, vol. 17, issue 1, 55-65

Abstract: It is widely acknowledged that even in the presence of involuntary unemployment, real labour markets are characterized by sluggish wage adjustments and the persistence of unemployment. In this paper we give a simple explanation focusing on this phenomenon. We show, in fact, that sticky wages may be the natural outcome of rational decisions, taken by competing workers who may find it optimal to demand higher wages than full-employment wages. The key element driving the result is the slope (or elasticity) of labour demand schedule; in the case of rigid labour demand, wage requests of workers are kept high because of reduced unemployment opportunity costs. This contrasts with other approaches to the analysis of unemployment, where only the level of labour demand (i.e. the macroeconomy) is considered. In addition, desire of working and effort required in the execution of the job, are also understood to influence the degree of wage stickiness.

Keywords: Sticky wages; involuntary unemployment; labour demand elasticity; game theory (search for similar items in EconPapers)
JEL-codes: C72 E24 J23 J64 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Sticky wages, labor demand elasticity and rational unemployment (2014)
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