Day 12: Sticky Wages

Keynes blames the stickiness of wages for distortions in the job market, which affect employment rates. Looking at the trends exhibited by the economy during the Great Recession of 2008, nominal wages couldn't decrease owing to the sticky nature of wages. Companies responded by increasing lay-offs to cut costs without reducing the wages of the remaining employees.

Therefore, the popular sticky wage theory postulates that employee pay tends to respond slowly to changes and exhibits resistance to decline even under deteriorating economic conditions. This can be attributed to the fact that workers will fight against a reduction in pay, so a firm will seek to reduce costs elsewhere. In a case of rising unemployment, wages of those workers who remain employed tend to stay the same or grow at a slower rate instead of decreasing with a decline in labour demand. Thus, wages are "sticky-down" as they can move up easily but experience difficulty moving down. Real wages are instead eroded through the effects of inflation.

This is a very sound theory as in reality, workers are naturally more open to pay raises than pay cuts. Companies, too, don't challenge this as they want to prevent any hit to their reputation that can be associated with pay cuts and causing dissatisfaction to labour unions.

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Day 10: The Interventionist

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Keynes is regarded globally as the founding father of Macroeconomics. Keynesian economics is a macroeconomic theory of total spending in the economy and its effects on output, employment, and inflation. This theory was the first to make the move from studying individual markets to studying broad national economic aggregate variables and constructs. Macroeconomics as a distinct discipline only came to fruition due to Keynes's seminal work, The General Theory of Employment, Interest, and Money. Through this macroeconomic masterpiece, Keynes introduced the notion of aggregate demand, a sum of consumption, investment, and government spending. He put forth the idea that it is this aggregate demand that drives supply in the economy, and not vice versa like the classicists believed. Therefore, demand is the driving force of the economy, not supply. Keynesian economics thus argues that healthy economies spend or invest more than they save. To create jobs and boost consumer purchasing p

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Reading Keynes's The General Theory of Employment, Interest, and Money is a life-changing experience even in the 21st century. This means it was practically explosive during his times. A time dominated by the reigning classicists and their accepted axioms and ideologies, Keynes challenged all these existing theories and his book was a radical reconsideration of some of these founding principles of Economics, provoking a widespread revolution in economic thought. Keynes's affinity and prowess for problem-solving shines throughout this masterpiece of a book. The heart of The General Theory lies in its analysis of poverty and unemployment, which Keynes saw as having permanent and tragic political and economic consequences. According to Keynes, unemployment is not caused by rigidity of wages or prices, but by lack of incentives to increase production, due to lack of effective demand in the short run and lack of knowledge of the future in the long run. Keynes also addressed the &q

15 Days of Keynes.

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