What, according to keynesian economists, are the factors that lead to rigidities in wages and prices?
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Answer:
According to Keynesian economist their are various reasons which allows for the rigidity of wages and prices.
1. Money illusion: Employees will strictly resist any changes and cuts to their existing money wage rates. Contrary to this they do not understand that real wages(The real earning power of money) is something to considered.
2. Fixed term of employment through contracts: Most employees entre into written contracts of 1-2 years while getting hired for the job. These terms of employment are not likely to change in short run thus encouraging wage and price rigidity.
3. Labour laws advocating fixed wages for the welfare of employees: Their are several laws implemented by Union and state governments to ensure the welfare of employees by enforcing strict wage laws resulting into rigidity of wages.
4. Employers reluctance in reducing standard wages as the productivity of employees will go down