Price-wage Rigidity

PRICE-WAGE RIGIDITY 3

Price-wage rigidity refers to a situation when the nominal price isnot prone to change. Complete rigidity occurs when the price-wageremains constant for a long duration, say a year. In the event thatthe rigidity is not complete, the price-wage may change after a shortduration. However, in an economy, it is not possible for all pricesto assume the same level of rigidity some are bound to be more rigidthan others are (Andersen, 1999). The common factors that affectprice-wage rigidity are demand and supply. Under normalcircumstances, the two factors are bound to change the prices andwages in an economy but the concept price-wage rigidity ensures thatthey do not.

I agree with Keynes’ assessment that for price rigidity tofunction, government involvement is paramount (Palley, 2005). Theforces of supply and demand are dynamic and it would therefore bealmost impossible to maintain the same price over a long period. Ittherefore follows that unless there is government involvement, thedynamic forces of demand and supply are bound to interfere with thewage-price rigidity.

Government involvement in the markets in order to reinforceprice-wage rigidity is necessary because players in the economy needan incentive to deter them from adjusting prices to meet their targetprofits. Otherwise, without the government control, suppliers wouldincrease their profits every time the demand for their goods went upand consequently interfering with price rigidity (Klause &amp Lubik,2007). On the other hand, the prices of goods would go down if therewere an oversupply. If the changes occur within a short duration, theprice curve would assume the shape of sharp tapers. It is thereforenecessary for the government to control prices if it seeks to haverigid prices in the economy.

References

Andersen, T. M. (1999). Price rigidity: Causes and macroeconomicimplications. OUP Catalogue.

Krause, M. U., &amp Lubik, T. A. (2007). The (ir) relevance of realwage rigidity in the New Keynesian model with search frictions.Journal of Monetary Economics, 54(3), 706-727.

Palley, T. I. (2005). From Keynesianism to neoliberalism: Shiftingparadigms in economics. Neoliberalism: A critical reader,20-29.