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It’s basic economics that sticky wages cause unemployment. In any economy, there will be some firms which become less competitive over time; in order to restore their competitiveness, they will need to cut their wages. If they can’t do that, they will simply go bust. But cutting nominal wages is very hard. The result is that firms go bust unneccessarily, and their employees get laid off unneccessarily. On top of that, thanks to wage stickiness, there are many firms paying above-market wages to their employees — that is, wages which are above what an equally-qualified person would require to do the same job. That too causes unemployment: if a firm would like to be able to hire 20 people at $15 per hour but instead can hire only 15 people at $20 per hour, that reduces the firm’s overall productivity and also means five fewer jobs in total. |