Final answer:
Wage stickiness can occur due to fixed wage contracts and minimum wage laws. Fixed wage contracts establish wages for a specific time period, providing stability for workers and firms. Minimum wage laws set a floor for wages, protecting low-skilled workers. Both factors contribute to wage stickiness.
Step-by-step explanation:
Wage stickiness refers to the resistance of wages to change, particularly downward. One source of wage stickiness is a fixed wage contract. When workers and firms enter into fixed wage contracts, wages are determined for a specific period of time and cannot be easily changed until the contract expires.
This helps to avoid the complexity of negotiating contracts frequently and provides stability for both parties. Another source of wage stickiness is minimum wage laws. These laws set a floor for wages, preventing employers from reducing wages below a certain level.
This protects low-skilled workers from exploitation and ensures a minimum standard of living. Overall, both fixed wage contracts and minimum wage laws contribute to wage stickiness in the labor market.