1---
 2meta: 
 3  date: false
 4  reading_time: false
 5title: "Flexible Wages"
 6date: 2023-10-05
 7description: "A thorough explanation of flexible wages and their role in balancing labour supply and demand."
 8tags: ["Flexible Wages", "Labour Market", "Economics", "Wage Rigidity"]
 9---
10
11## Background
12
13Flexibility in wages refers to the adjustment of hourly, daily, or monthly pay rates according to the economic conditions to achieve equilibrium in the labour market. This concept implies that wages adapt quickly to changes, such as shifts in demand or supply for labour. In theoretical frameworks, this adaptability helps maintain full employment by alleviating labour market imbalances.
14
15## Historical Context
16
17The debate over wage flexibility has origins in the classical views of economists like Adam Smith and David Ricardo, who postulated that labour markets tend toward natural equilibrium. Over time, Keynesian economists contested this, arguing that wage inflexibility often leads to persistent unemployment. This notion catalyzed important discussions on labour market policies and interventions.
18
19## Definitions and Concepts
20
21Flexible wages are wages that adjust instantaneously in response to economic environment changes to balance supply and demand for labour. The key dimensions of wage flexibility are:
22
23- **Nominal Wage Flexibility**: Reflects changes in wage levels without adjusting for inflation.
24- **Real Wage Flexibility**: Refers to wage adjustments reflecting price-level changes, thus maintaining purchasing power.
25
26In some economic theories, real wages are assumed to be flexible, but nominal wages are considered fixed in the short run due to established wage contracts, unionized bargaining, or other institutional factors.
27
28## Major Analytical Frameworks
29
30### Classical Economics
31
32Classicists argue that flexible wages are essential for self-regulating markets where supply and demand naturally reach equilibrium, preventing long-term unemployment.
33
34### Neoclassical Economics
35
36Neoclassical models often support the idea that flexible wages lead to efficient and optimal labour market outcomes by ensuring that all individuals willing to work at prevailing wage rates find employment.
37
38### Keynesian Economics
39
40Keynesian economics introduced the concept of wage rigidity, where sticky nominal wages due to contracts and collective bargaining can cause unemployment during economic downturns.
41
42### Marxian Economics
43
44Marxists critique both wage flexibility and rigidity from the standpoint of labour exploitation, viewing flexible wages as a tool for capitalists to maintain their advantage over workers.
45
46### Institutional Economics
47
48Institutionalists study the role wage norms, contracts, unions, and other entities play in shaping nominal wage rigidity and affecting overall labour market outcomes.
49
50### Behavioral Economics
51
52Behavioral economists examine how psychological factors and fairness considerations may lead to resistance against wage flexibility, especially downward adjustments.
53
54### Post-Keynesian Economics
55
56Post-Keynesians emphasize structural and institutional factors, advocating for policies to manage wage flexibility in a way that balances efficiency with social equity.
57
58### Austrian Economics
59
60Austrian theorists advocate for completely unregulated labour markets where flexible wages allow the market to set clearing prices naturally without intervention.
61
62### Development Economics
63
64In the context of developing countries, wage flexibility can impact labour migration, informal employment, and broader economic growth patterns.
65
66### Monetarism
67
68Monetarists, led by Milton Friedman, argue the natural rate of unemployment is consistent with flexible real wages adjusting to maintain full employment.
69
70## Comparative Analysis
71
72Comparing these frameworks yields insight into how flexible wages can address or exacerbate issues like unemployment, inflation, and economic stability. For instance, while classical and neoclassical theories emphasize market efficiency, Keynesian and post-Keynesian frameworks focus on the possible adverse effects of wage rigidity on unemployment.
73
74## Case Studies
75
76- **Response to Shock**: During economic downturns, wage flexibility in different countries varies, demonstrating how wage rigidity may prolong high unemployment rates.
77- **Unionized Sectors**: Analyze sectors with strong union power to understand how collective bargaining impacts wage adjustments during economic shifts.
78
79## Suggested Books for Further Studies
80
811. **"The General Theory of Employment, Interest, and Money" by John Maynard Keynes**
822. **"A Theory of Income Distribution" by Duncan K. Foley**
833. **"The Invisible Hand: Essays in Classical Economics" by Adam Smith**
844. **"Free to Choose" by Milton Friedman**
85
86## Related Terms with Definitions
87
88- **Wage Rigidity**: Resistance or lack of wage changes in response to supply and demand shifts in the labour market.
89- **Nominal Wages**: Wages measured in current monetary terms, unadjusted for inflation.
90- **Real Wages**: Wages adjusted for inflation, representing the purchasing power of income earned.
91- **Phillips Curve**: An economic concept depicting an inverse relationship between inflation and unemployment.
92- **Wage Contract**: Agreement stipulating wage rates and conditions of employment, typically for a set period.