The Downward Rigidity of Wages

Downward rigidity of wages is the tendency of workers to have a minimum acceptable wage beneath which they are unwilling to work. While it may be seen as a means by which workers wish to defend a threshold of security for themselves, it creates cost rigidity for the employers. Wages can have complex connotations ranging from a means of sustenance to a purely psychological measure of self-worth for the workers. However, for employers, wages are seen purely as a cost. Since, the willingness of the employer to incur a cost is directly proportional to the possibility of profit, the rational self-interest of the employer would demand that wages be flexible and correlated to the possibility of profit.

However, since wages are a key indicator of viability of livelihood for workers, the interests of workers are best served by having the security of a minimum wage. The tendency of workers to refuse to work beneath a minimum wage creates downward rigidity of wages which is seen from the broader lens of cost rigidity by employers.

Since downward rigidity of wages contravenes the tenets of perfect competition and prevents a smooth application of the law of demand and supply, the rigidity can easily be a cause of unemployment. The rationale is that the flexibility that could have been attained through a lowering of wages is indirectly attained by substituting variable employment flow for wage moderation. Predictably, the consequences of wage rigidity have an effect beyond the immediate domain of employment.

A unit of currency can be seen either through the lens of its nominal value or through the glass of its ability to purchase a given amount of goods and services. Consequently, wages can also be either nominal or real. While nominal wages are tied to a figure which may or may not produce the same amount of goods and services as it did in the past, real wages have to do with the ability to purchase a certain amount of goods and services, regardless of the figure involved. If the bargaining power or economic awareness of workers is not sufficient to elicit a downward rigidity in real wages, the macro level rigidity in the mere figure of the wages would lead to inflation. If rigidity is restricted to nominal wages, inflation serves as an indirect means of wage flexibility by generating the means for a reduction in real wages.