Final answer:
In the long run, the economy adjusts and wages become flexible as contracts and informal agreements are renegotiated. Wages are sticky in the short term due to mechanisms like implicit contracts and efficiency wage theory. The correct option is d. flexible because contracts and informal agreements are renegotiated in the long run.
Step-by-step explanation:
When the economy adjusts in the long run, wages tend to be sticky in the short term, especially when it comes to downward adjustments; however, in the long run, contracts and informal agreements can be renegotiated, which makes wages more flexible. The correct answer is d. flexible because contracts and informal agreements are renegotiated in the long run. Economic theories propose several reasons for wage stickiness, such as implicit contracts, efficiency wage theory, adverse selection of wage cuts, insider-outsider model, and relative wage coordination. These elements contribute to the phenomenon where even if the economy or a business is struggling, wage decreases are rare and occur at a slow pace.
Various mechanisms in the labor market contribute to wage stickiness. Implicit contracts might prevent wages from falling as both employers and employees may prefer to keep wages stable during economic downturns to maintain morale and productivity. The efficiency wage theory suggests that paying above the market rate can increase productivity and reduce turnover. Adverse selection of wage cuts could lead to the departure of the best employees, who feel undervalued. The insider-outsider model theorizes that current employees (insiders) have more power in wage negotiations than potential new employees (outsiders). Lastly, relative wage coordination posits that workers are concerned about their wages in relation to others, and this makes employers reluctant to reduce wages even when market conditions suggest it might be necessary.
Therefore, wages tend to be sticky downward due to various market imperfections and considerations, but over time and in the long run, the flexibility of wages tends to increase as contracts are renegotiated and market conditions change.