Suboptimal Wage Rigidity: A Critique

This paper critically analyzes the concept of downward nominal wage rigidity (DNWR) in the unhampered market. We address the claims that DNWR can emerge from fixed contracts, resistance to wage-rate cuts by employees due to the money illusion, and resistance to wage-rate cuts by employers due to productivity or morale concerns. We also address the issue of labor unions. While we acknowledge unions can cause DNWR, we also demonstrate that the strong presence and power of unions require state interference on their behalf, and that in the unhampered market, unions are likely to have little to no power to establish restrictionist wage-rates. Thus, there is no natural obstacle to market clearance in the unhampered market. Methodologically, the paper is a theoretical analysis supplemented by an empirical analysis of the present economy. Its contribution is to produce an Austrian critique of existing empirical literature that demonstrates the rigidity of nominal wage-rates. Its most unique contribution is the application of existing Austrian analysis of efficiency-wage literature to empirical literature claiming to affirm Efficiency Wage Hypothesis.