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Sticky wages, labour demand elasticity and rational unemployment

Author

Listed:
  • Saul Desiderio

    (Shantou University)

  • Siyan Chen

    (Shantou University)

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.

Suggested Citation

  • Saul Desiderio & Siyan Chen, 2014. "Sticky wages, labour demand elasticity and rational unemployment," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 17(1), pages 55-65.
    • Handle: RePEc:ozl:journl:v:17:y:2014:i:1:p:55-65
    as

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    References listed on IDEAS

    as
    1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
    2. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    3. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    4. James D. Montgomery, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 163-179.
    5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sticky wages; involuntary unemployment; labour demand elasticity; game theory;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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