Incomplete information-market clearing
In this model, the slow adjustment of wages stems from the slow response of workers to price changes or incomplete information about them. Some economists think that wages are completely flexible and scalable, but due to expected short-term mistakes, wage adjustment is slow, pointing out that when nominal wages are raised because of rising prices, workers mistakenly think that their real wages have been raised and are willing to work more hours. In this way, in the short term, until workers realize that the increase in nominal wages is purely caused by the increase in price level, the increase in nominal wages will be accompanied by higher output and less unemployment.
Robert lucas put the explanation of wage stickiness in a clear framework of rational expectation. In the Lucas model, workers do not know the current price level when deciding whether to work at the current nominal wage. When they see that their wages are rising, they will think that the rise in wages may be due to the rise in the overall price level, or because the wages of their jobs have risen. If the reason for the increase in wages is the increase in the price level, then their actual wages will not change, nor will they increase the workload they provide. However, if the wages of such laborers increase, their real wages will increase, and they will be willing to work more. Because workers have incomplete information when deciding whether to extend working hours, they have to compromise. In this way, Lucas reveals the short-term substitution relationship between higher wages and higher employment, which depends on the completeness of workers' information.
Coordination problem
It focuses on the process that manufacturers adjust prices in the face of changes in demand. Assuming that the money stock increases, the final price increases in proportion to the money supply, and the output remains unchanged. In the process of adjustment, because it is impossible for manufacturers in the economy to get together to coordinate their own price increase, each manufacturer can slowly raise the price only when he feels the effect of money stock change through the increase of commodity demand at the current price level. The problem of coordination also helps to explain why wages are downward sticky, that is, why wages will not fall immediately when total demand falls. Any manufacturer's wage reduction will lead to workers' dissatisfaction and resignation, and no other manufacturers will follow suit. It is likely that those manufacturers with the best profit situation will take the lead in reducing the nominal wages of employees, and then all manufacturers will act accordingly, so that wages can be gradually reduced.
Efficiency wage and price change cost
Efficiency wage theory emphasizes that wage is a means to motivate the labor force. The efforts made by workers in this position are related to the remuneration received by this position relative to other alternative positions. Manufacturers may want to pay their employees more than the market clearing wages to ensure that workers work hard to avoid losing this good position. This theory itself cannot explain why the average nominal wage changes slowly, but it does help to explain the existence of unemployment. However, combined with the fact that changing prices requires costs, the efficiency wage theory can explain a certain nominal wage stickiness, even if the cost of repricing is very small. By combining this stickiness with the coordination problem, the theory can help explain the wage stickiness.
long term relationship
In the process of developing the explanation of wage stickiness, we will base our explanation on the above theory, and we will also base our explanation on the fact that the labor market involves the long-term relationship between manufacturers and workers. Most employees want their current jobs to last for some time. Working conditions, including wages, are renegotiated regularly, but not frequently. This is because the cost of frequently re-determining wages is very high. Usually, manufacturers and workers reconsider their wages once a year and make adjustments. At any time, whether explicitly or implicitly, manufacturers and workers must agree on the salary plan of current employees. Corresponding to the established working hours per week and the basic salary corresponding to the type of work, the salary may be higher in the case of overtime. Based on this, manufacturers determine the employment level of each period.
Now let's look at how wages are adjusted when labor demand changes and manufacturers increase working hours. In the short term, wages rise along the WN curve. Due to the increase in demand, workers will strongly demand an increase in basic wages in the next labor agreement period. However, it will take some time for all wages to be renegotiated. Moreover, not all wages can be negotiated at the same time. Because the dates of wage determination are staggered, that is, overlapping.
Some workers who set their wages in the early stage will not adjust their basic wages to the level needed to achieve long-term economic balance in one step, because if they do, manufacturers would rather hire workers whose wages have not increased; In this case, if the renegotiated wages are too high, those workers who set their wages early will face the danger of unemployment. So wages are only getting closer to equilibrium step by step. The wages of workers whose wages are set later will exceed those of workers whose wages are set earlier. But it is only gradually approaching the basic salary under full employment equilibrium. Because each party who renegotiates wages must consider the level of their wages relative to those who have not renegotiated. In the process of adjustment, when wages (and costs) change, manufacturers will also reset prices. The adjustment process of wages and prices will continue until the economy returns to a truly balanced full employment equilibrium.
In reality, there are two main reasons for the slow adjustment of wages and prices: first, some relatively small costs of re-determining wages and prices will also slow down the adjustment process. Moreover, in the economy of a big country, there are many different forces affecting the supply and demand of various markets, coordinating the adjustment of wages and prices, and making them return to equilibrium quickly, which is difficult to overcome. Second, why don't manufacturers and unemployed workers negotiate with each other to reduce wages and create employment opportunities for the unemployed when there is a large number of unemployment? According to the theory of efficiency wage, the main reason is that this practice is harmful to the morale and productivity of on-the-job workers. To sum up, the combination of pre-determined wages and staggered wage adjustments over a period of time led to the gradual adjustment of wages and output we observed in the real world, which explained this dynamic process.
Insider-outsider model
The insider-outsider model predicts that wages will not respond enough to unemployment. Finally, let's pay attention to the point that the connection between wage behavior and unemployment stems from the simple fact that the unemployed are not sitting at the negotiating table. Manufacturers can effectively negotiate with on-the-job workers, but not with the unemployed. This has a direct significance. For manufacturers, dismissal labor costs-dismissal costs, employment costs and training costs. Therefore, insiders have an advantage over outsiders. More importantly, unless insiders accept a pay cut, threatening them with unemployment will not be very effective for two reasons. First of all, threatened people may give in, but they will not perform well in morale, effort and productivity. Secondly, if manufacturers really fire high-paying workers and recruit the unemployed with low wages, the unemployed will now become insiders and show exactly the same resistance to pay cuts as their predecessors. Therefore, manufacturers will face the possibility of multiple rounds of expensive labor dismissal before obtaining a batch of tame labor. If an agreement is reached with insiders to pay them higher wages, the situation will be much better even if a large number of unemployed workers are eager to get employment at lower wages.