Economics Unemployment Questions
Wage rigidity refers to the resistance or inability of wages to adjust downward in response to changes in the labor market conditions, such as an increase in unemployment or a decrease in demand for labor. It occurs when wages are sticky or inflexible, meaning they do not easily decrease even when there is excess labor supply. This can lead to a situation where the market-clearing wage, which equates labor demand and supply, is higher than the prevailing wage, resulting in unemployment. Wage rigidity can be caused by various factors, including minimum wage laws, labor unions, social norms, and long-term contracts.