Wage-Price Rigidity essay


Price and wage rigidity can be termed as the element of a marketwhere the prices of commodities and the wages of employees refuse toadjust or change in the same proportion as the demand and supplyequilibrium changes. In terms of price, the price of a commodity orservice may refuse to change despite there being an increase indemand. This situation creates a deficit in supply. The opposite ofthis situation is true where the prices refuse to drop when thedemand for a commodity or service reduces (Gupta, 2014). The price isnormally higher than that which the market values dictate hence itcreates a surplus in supply. Wage rigidity occurs when employers areunwilling to either reduce or raise the employees’ wages owing tochanges in the demand and supply of labor. For instance, when thereis high supply of labor, the employer may not immediately reduce thewages of the current employees.

I do totally support the Keynesian’s argument that rigidity inprices and wages require government intervention. It is clear fromresearch that employers can take advantage of the rigidity in pricesand wages to exploit employees and it is only government interventionsuch as fiscal policy that can alleviate this problem. It is alsoevident that if the market is left unchecked, business people wouldexploit consumers through charging them high prices (Bruno, 2013).Although the classical economists are opposed to this assertion of aprice and wage rigidity, research will indicate that indeed pricesand wages do not change immediately with changes in the demand andsupply equilibriums. The time that the changes take to occur callsfor the government to intervene and control the prices and the wages.


Bruno, M. (2013).&nbspImport Competition and Macro EconomicAdjustment under Wage-Price Rigidity. Cambridge,Mass: National Bureau of Economic Research.

Gupta, G. S. (2014).&nbspMacroeconomics: Theory and applications.New Delhi: Tata McGraw-Hill.