Sticky Wage Theory

Where are prices not sticky? The stock market. Stock prices can go up and down multiple times in a minute...they’re very sensitive to the economy and the whims of investors. Wages, on the other hand, are as sticky as that lollipop stuck in your hair.

The sticky wage theory is the idea that wages are super-slow to change in response to the economy, or other factors. Similar idea to how prices at the grocery store or your favorite restaurant are slow to change.

But sticky wages are special; while prices more freely move up or down, wages usually only trend upward. Plus, wages are stickier than prices, i.e. they change less often. The sticky wage theory purports that, when unemployment rises and the demand for labor drops, the wages of the lucky people still employed don’t drop; rather, they stay stagnant or rise reallyyy slowly.

Economic theory tells us lower demand for labor should lead to lower wages, but this doesn’t happen often in real life. Wages are considered sticky-down, meaning they can rise with less resistance than they’ll fall.

Why does this happen? Many think that lowering wages, especially during a down-time, would disrupt their business. Lower worker morale, or needing to rehire more people after some potentially quit, are more costly than just leaving wages alone. Even in tough times, companies want to keep their wages competitive and workers happy.