Question

Do you think it is rational for workers to prefer sticky wages to wage cuts, when the consequence of sticky wages is unemployment for some workers? Why or why not? How do the reasons for sticky wages explained in this section apply to your argument?

a) Yes, it is rational as sticky wages provide a sense of job security and stability for workers.
b) No, it is not rational as the risk of unemployment outweighs the benefits of wage stability.
c) It depends on the overall economic conditions and the specific industry.
d) The reasons for sticky wages do not affect the rationality of workers' preferences.

Answer 1

Workers may find it rational to prefer sticky wages for job security and stability, even though it could cause unemployment, due to difficulties in coordinated wage reductions and the negative impact on worker morale and productivity.

Step-by-step explanation:

It can be argued that it is rational for workers to prefer sticky wages as they offer job security and wage stability, which are valued during economic downturns. However, sticky wages can lead to unemployment since employers may reduce headcount rather than wages. Keynes' coordination argument describes a significant reason why wages are sticky: It is challenging to coordinate wage reductions across the market, which could otherwise mitigate unemployment. Additionally, businesses may avoid wage cuts to prevent a negative impact on worker morale and productivity. This preference for stable wages, despite the potential for increased unemployment, underscores the complexity of labor market dynamics and the trade-offs workers face between job security and employment levels.