Efficiency wages, implicit contracts, and union contracts explain why wages may be sticky downward in the labor market due to factors like wage rigidity and mutual agreements between employers and employees.
Efficiency wages, implicit contracts, and union contracts are all examples of why wages may be sticky downward. Efficiency wages are set above the equilibrium wage rate to motivate workers, implicit contracts suggest a mutual agreement between employers and employees to maintain stable wages, and union contracts restrict wage reductions.
These factors contribute to wage rigidity in the labor market, leading to slower wage adjustments even during economic downturns. They highlight the complexities of wage determination and the impact of various labor market influences on wage flexibility.
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