Sticky Wage Theory

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DEFINITION of 'Sticky Wage Theory'

An economic hypothesis that the pay of employed workers tends to respond slowly to the changes in a company's or the broader economy's performance. When unemployment rises, the wages of those workers that remain employed tend to stay the same or grow at a slower rate than before rather than falling with the decrease in demand for labor. Specifically, wages are said to be "sticky-down" since they can move up easily but move down only with difficulty.

BREAKING DOWN 'Sticky Wage Theory'

Some economists don't believe that wages are sticky. Those who do have posed a number of theories as to why wages are sticky: it is difficult for workers to accept pay cuts; some workers are union members with long-term contracts or a company may not want to expose itself to the bad press associated with wage cuts. By contrast, the prices of goods tend not to be sticky; their prices change easily and frequently in response to changes in supply and demand.

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