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Assume the economy falls in a recession and the demand for labor decline. Do you prefer...

Assume the economy falls in a recession and the demand for labor decline. Do you prefer sticky wages to flexible wages? Knowing the consequence of sticky wages is unemployment for you and some of your co-workers, and the consequence of flexible wages in reduced wages for all. Explain why or why not.

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Answer #1

Recession has reduced vacancies so that job finding becomes difficult. Unemployment compensation is a smaller percentage of the market wage in most cases so that if a worker prefers sticky wages, she will have to remain satisfied with a very low income. In case the worker prefers flexible wages, wages will decline for all workers but workers will not lose their jobs. This implies that a worker faces a dilemma between a very low or sometimes no unemployment insurance under sticky wages or a slightly lower income in case of flexible wages. Then it is likely that the worker will prefer flexible wages to maintain a stable standards of living.

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