Sources of Wage Inflexibility

The theory of inyoluntary unemployment assumes that wages are inflexible. But this raises a further question: Why do wages not move up or down to clear markets? Why are labor markets not iike the auction markets for grain, corn, and common stocks?

These questions are among the deepest unre- .solved mysteries of modern economics. Feweconomists today would argue that wages move quickly to erase labor shortages and surpluses. Yetno one com- . pletely understands the reasons for the sluggish behavior of wages and salaries. We can therefore provide no more than a tentative assessment of the
sources of wage inflexibility.

Most goods and all labor are sold in admi<isrered markets and not in competitive auction markets. No- .body grades laborinto “grade Bweb page developer” . or “class AAA assistant professor -ofeconomics.” NQ specialist burns the midnight oil trying to make sure that the ‘wages of computer programmers or professors are set atJUStthe tnarket-clearing levelwhere all qualified workers are placed into jobs.

For unionized labor markets, the wage patterns are even more rigid. Wage scales are typically set for a 3-year contract period; during that period, wagesare not adjusted for excess supply or demand in particular areas. Moreover, unionized workers seldom
accept wage cuts even when many of the union’s workers are unemployed.