What is price-wage rigidity?

Price-Wage Rigidity:

Price-wage rigidity occurs when costs and incomes do not adjust in the general economy. Price rigidity, also known as price stickiness or sticky prices, refers to a situation under which commodity prices are inflexible. Commodity rates remain unchanged under certain circumstances. Price rigidity is common in oligopolistic markets. In an oligopoly economy, the sellers set the equilibrium price and do not adjust it later due to various factors. Businesses can hit a point where they are unable to reduce salaries (Ting, 2017). Such requirements can be determined by collective agreement rules or a fear of losing productivity. Now, when a company reaches such a situation then, it is acceptable to say that the company / business faces labor rigidity. Most economists believe that business cycles are natural process cycle, which moves over time, and does need or require aid from the government.

The Keynesian Economics and Short-Run Economic Situations:

The Keynesian economics comprises of some theories, which try to assert that aggregate demand strongly influences economic output and employment in the short-run. The recession is a good example of a short-run economic situation. Just to be clear on this, the Keynesian Economists say that prices are not influenced by the short run economic situations. Such economists argue that prices and wages tend to be rigid when the supply and demand fluctuates. The economists, therefore, believe that it is upon the government to intervene and level things out. It is due to these reasons that many companies tend to lay off some of the employees in the workplace than to cut wages when facing potential profit loss. It is worth acknowledging that workers work for wages and if the wages are much lower, then the workers cannot be in a position to adequately sustain themselves together with their families. The fact, therefore, remains that low wages will attract few employees resulting in unemployment.

Government Intervention in the Market:

Keynes assessment that wage-price rigidity requires government’s involvement in the markets? Why? Why not?

Disagreement with Keynesian Assessment:

I do not agree with Keynesian’s assessment that price-wage rigidity requires government involvement in the markets. To start by, I support the classical economists’ idea that prices and quantities adjust to the changes in the forces of supply and demand. The Keynesian economists do not want to agree with this. In real life situation, we experience the influences of demand and supply. When the commodity is in high demand, the sellers shoot up the price. When the demand reduces, the sellers reduce the prices. Even though the government’s involvement in the market is crucial, it sometimes yields certain limitations (Lichtenstein, 2016). The government principles mostly operate in its favor, and all fees and taxes go to the government. Though the taxes improve the economy, business people in most cases state that government involvement in markets has the sole objective of making money.

The Role of Supply and Demand:

Moreover, when the amount of the commodities in the market increases, the supply increases. The buyers will, therefore, have several alternatives to choose from. In this process, the sellers will, therefore, reduce the prices to attract the consumers. We encounter these issues in our day-to-day operations, and they try to prove the classical economics ideas. The politics shifts can negate the government-business relationships. This is to say that over the years politics changes and new government officials resume public offices. When the new regime does not fully understand how the outgoing regime had been solving the price-wage issues, this may be a limiting factor. It is due to these reasons that some economists suggest that the government should concentrate on the legislative, judicial, and executive aspects of the country, not the private sector. The law of demand and supply plays vital roles in the market. I, therefore, believe that wage-price rigidity does not require government involvement in the market.

References

Lichtenstein, P. M. (2016). Theories of international economics.

Ting, Chao Chiung. “Price Rigidity And Wage Rigidity: Market Failure Or Market Efficiency.” International Journal of Economics and Finance 9.11 (2017): 82. Web.