Wage-Price Rigidity: Keynes Assessment, Government (Essay Sample)
Classical economists belief that prices and quantities adjust to the changes in the forces of supply and demand and that the economy produces its potential output in the long run. On the contrary, Keynesian economists believe because of price and wage rigidities the economy’s equilibrium output in the long run may be less than its potential output. What is price-wage rigidity? Do you agree with Keynes assessment that wage-price rigidity requires government’s involvement in the markets? Why? Why not?source..
The price-wage rigidity emphasizes that prices and wages are not flexible, unlike what the classical theory states, meaning that it is not possible to reach equilibrium in the markets (Ventelou, & Nowell, 2015). The classical economists explain unemployment as the result of mismatches. Keynesian economics suppose that the sticky prices and wages do adjust to the market conditions because of rigidity and government intervention is then necessary. Wages are rigid since workers will not necessarily accept lower wages that negatively affects their cost of living. The actions of trade unions mean that employers are unlikely to cut wages, while workers are more concerned with wages and not the level of employment. Producers can reduce production and lay off workers rather than cut prices as they have a monopoly. The Keynesian explanation of the price-wage rigidity highlights that there are cases of severe unemployment.
Keynes assessment wage-price rigidity and government’s involvement in the markets
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