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 3: In the Long Run, We are All Dead!

Today, I attended quite an interesting Public Economics lecture on government grants. My professor was talking about how the US government had approved $2.2 trillion worth of loans and grants in order to soften the blow of the COVID-19 pandemic on the most affected families and businesses. He then asked a fundamental question that left us pondering: "Do these hefty government grants and packages financed by taxpayers' money which benefits only a select few make good economic sense?" This brings us back to the 20th century, specifically the 1930's, and how Keynes's influential ideas led to aggressive government policies, rescuing the global economy from the Great Depression. Keynes was a staunch proponent of short-term policy interventions and famously believed that, "In the long run, we are all dead." Yes, things might get better in the future, but why wait for when no one will be alive to reap the fruits of the future? In times of economic crisis, the...

Day 4: Keynesian Beauty Contest

Today, as I indulged in a friendly game of poker (with no real money, of course!) with my roommates, I was hyper-aware of the level of wits that this mere card game truly entailed. I couldn't simply make a naïve move, but I had to think about what my opponents would play in order to calculate my move. Deeper into the game, I began thinking about what my opponents thought about what I would do, and I based my move on that. This opened my eyes to how Keynes's popular Beauty Contest theory was so diverse in its applicability. Keynes had come up with this perfect analogy to represent the inner-working of the stock market and to give an explanation for its volatility. "Successful investing is anticipating the anticipations of others." Thus, in the chess game of speculative markets, you win not by picking the soundest investment, but by picking those that are bid up higher by others in the same game. However, bounded rationality of individuals can be a major deterrent to...

15 Days of Keynes.

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