Question

Does it make sense that wages would be sticky downwards but not upwards? Why or why not?

Answer 1

Wages are sticky downwards and not upwards because there are a set of minimum wages and labour contracts or employment contracts that need to be followed. This means that even if the aggregate demand is less or that the production is less, the employers would need to pay atleast the minimum wage set by the government. This could also lead to more unemployment because of cost cutting which could not be done by wage reduction.

This makes the wages sticky downwards rather than upwards.