Sticky wages in the context of "Chicago school of economics"

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⭐ Core Definition: Sticky wages

In economics, nominal rigidity—also referred to as price stickiness or wage stickiness—describes a situation in which a nominal price is slow to adjust or resistant to change.

Complete nominal rigidity occurs when a price remains fixed in nominal terms for a relevant period of time. For example, the price of a good may be contractually set at $10 per unit for an entire year, regardless of changes in supply and demand conditions. Partial nominal rigidity occurs when prices can adjust, but less than they would under conditions of perfect flexibility. For instance, in a regulated market, there may be legal or institutional limits on how much a price can change within a given year.

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👉 Sticky wages in the context of Chicago school of economics

The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigler are considered the leading scholars of the Chicago school.

Chicago macroeconomic theory rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. The freshwater–saltwater distinction is largely antiquated today, as the two traditions have heavily incorporated ideas from each other. Specifically, new Keynesian economics was developed as a response to new classical economics, electing to incorporate the insight of rational expectations without giving up the traditional Keynesian focus on imperfect competition and sticky wages.

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Sticky wages in the context of New Keynesianism

New Keynesian economics is a school of macroeconomics that seeks to provide explicit microeconomic foundations for Keynesian economics. It emerged in the late 1970s and 1980s as a response to criticisms raised by proponents of new classical macroeconomics, particularly the emphasis on rational expectations and the Lucas critique.

New Keynesian models typically incorporate elements of imperfect competition and nominal rigidities—such as sticky prices and sticky wages—to explain why markets may not always clear and why monetary policy can have real short-term effects. These features distinguish the New Keynesian framework from earlier Keynesian approaches while preserving the central insight that aggregate demand plays a crucial role in economic fluctuations.

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← New Keynesianism ← Chicago school of economics ← New Keynesian economics
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