according to Keynesian economists, are the factors that lead to rigidities in wages and prices?
Answers
Answer :- Factors which lead to rigidity in wages and prices are as follows:-
1) Money Illusion - People do not like cut in wages. They would not crib about increase in price much as decrease in wages. This is creating an illusion that with increased wages they save more which is not the cases. With increased in prices in parallel they may not eventually save more.
2) Wage Fixation through Contracts - In most free market economies wages are fixed by the firms through contracts made with the workers for duration of years.
3) Minimum Wage Laws - Money wage stickiness are enforced by local governments.
4) Efficiency Wages - employers themselves are not keen in lowering the wages since high wages make workers more efficient which in turn increases productivity.
According to Keynesian economics, due to money wage rigidity, the ie. downfall of wages, three reasons are pointed which cause this stickiness of money wage rate.
Keynesian noted that money wage rate is a cause for unemployment of labor.
The workers become disappointed due to poor wages for their services.
So they don't give proper effort to do work when they leave the job and unemployment is increased.
Money wage cannot change the unemployment of labour.