Sticky Wages, Labour Demand Elasticity and Rational Unemployment

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, the desire to work and effort required in the execution of the job, also influence the degree of wage stickiness.