Sticky Wage: Model & Theory

Instructor: Brianna Whiting
The word 'sticky' isn't usually one we see applied to the business world. But in this lesson, you will learn why we sometimes refer to wages as 'sticky.' We will also look at a model where we compare sticky wages to flexible wages.

A Beginning Look at Sticky Wages

Suppose you work at an apple farm. Each day, you show up to work promptly at 8:00 am so you can start picking apples. You gather your ladder, your bucket, and head off to pick apples from a tree. After one tree is completely cleaned of apples, you move onto the next. This cycle repeats itself until around 2:00 pm when you head to the barn to help sort apples according to how they will be used: for cider, for apple pie, and for apple jam. When the clock strikes 5:00 pm, your job ends.

You love your job and can't wait to go back each day. However, what would happen if bad weather plagued the apple farm? What if the apples were ruined and very few were able to be harvested? Would you still have a job? Would your pay decrease? If so, by how much? After all, if the apple farm is not producing any apples, they are not making any money, and therefore, may find it difficult to pay employees. We will learn the answers to these questions when we study the term sticky wages.

What is a Sticky Wage?

So, you may be asking, what do I mean by 'sticky' wages? Well, I'm sure you have gathered that the term sticky does not refer to something like honey, or glue, but rather is a way to describe wages that do not move very much; in other words, they 'stick.' These wages adjust very slowly to changes that affect the economy in general, or a specific company. So no matter what happens to a company, its employee wages won't be drastically slashed.

Let's take our apple picking example from earlier to better explain this term. When the weather ruins the apple crop, if the company has sticky wages, then you as an employee would see slow changes to your pay despite the turmoil the company may be facing financially after losing their apple crop. While the company may be experiencing a hardship, the wages they pay their employees adjust very slowly to the situation, even though the crops may have been lost in a quick one day storm.

Why are Wages Sticky?

Okay, so we know what sticky wages are, but why do wages maintain this state? This can be answered simply by the plausible reactions of employees when their pay decreases. For example, if the apple farm quickly docked every employee's pay by $5.00, many employees would be angered and most would be looking for another job. Also, the apple farm would run the risk of bad publicity when local media reports the huge pay cut and makes the apple farm look like they do not care about their employees' well-being or their families. If the apple farm bounces back the following season and has an abundance of crops and numerous positions to be filled, people may not be willing to work for a company that has been known to drastically cut wages, and therefore, making it important for the apple farm to maintain a good reputation with the community and most importantly, their employees.

Another reason why wages remain sticky is because of unions and contracts. For example, if an employee has a contract, then the employer will continue to pay the wages that they agreed upon when the employee was hired. Despite economic or company hardships, the employee's wage will not be affected and will remain 'stuck' at the pay level specified in the contract. Where unions are concerned, those employees that are members of a union are often protected from a sudden wage decrease. This is because a union protects their employees and sees to it that important factors, such as wages, are negotiated before any drastic measure is taken.

Sticky Wage Model

Let's take a moment to look at a model that helps explain how sticky wages work.

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