Wage rigidity

In macroeconomics, rigidities are real prices and wages that fail to adjust to the level indicated by equilibrium or if something holds one price or wage fixed to a relative value of another. Real rigidities can be distinguished from nominal rigidities, rigidities that do not adjust because prices can be sticky and fail to change value even as the underlying factors that determine prices fluctuate. Real rigidities, along with nominal, are a key part of new Keynesian economics. Economic models with real rigidities lead to nominal shocks (like changes in monetary policy) having a large impact on the economy.

Real price rigidity can result from several factors. First, firms with market power can raise their mark-ups to offset declines in marginal cost and maintain a high price.Search costs can contribute to real rigidities through "thick market externalities". A thick market has many buyers and sellers, so search costs are lower. Thick markets can be expected to occur more often during booms, and they thin during downturns. If this pattern causes marginal costs to increase during recessions, thick markets can lead to real rigidities. "Customer markets" can also create real rigidities. In customer markets, firms take advantage of their market power and refuse to lower prices because they do not want to give customers an incentive to shop elsewhere and search for prices that are even lower. They would rather offer the customer a consistent price and have the customer consistently shop at their store. Also, customers will likely not notice a price cut as much as a price increase, giving the store less of an incentive to cut prices.

The complexity of the "input-output table" can also lead to rigidity. Decentralized global supply chains lead to many firms competing for the same inputs and producing the same outputs, but an individual firm does not know whether the other firms and industries will be affected the same way in a shock. Cutting prices in a situation would not necessarily create more demand for a firm's products; it may just lead to lower profits and bankruptcy. Firms face large information requirements in determining how to optimize their pricing. They not only have to know the demand for their own goods and their own costs, they have to know the pricing factors for all their competitors and other firms in the vast market of inputs and outputs. Capital market imperfections lead to more real rigidities. Capital markets may have asymmetric information problems because borrowers are better aware of their situation than lenders. This can lead to firms seeking more external finance during downturns, which drives up the firm's cost and creates another rigidity. Imperfect information can also create rigidity in the consumer market. Consumers may see price as an indicator for quality. Firms may be reluctant to cut their prices if they fear that consumers might start to the product as "cheap".

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Wikipedia