How would constant adjustments to wages (see below) affect the slope of the aggregate supply curve? (Short-Run Aggregate Supply) In the short run, prices may rise faster than costs. Suppose that labor...
How would constant adjustments to wages (see below) affect the slope of the aggregate supply curve?
(Short-Run Aggregate Supply) In the short run, prices may rise faster than costs. Suppose that labor and management agree to adjust wages continuously for any changes in the price level.
The more often that workers’ wages could be adjusted to match prices, the more vertical the short run aggregate supply curve (SAS) would be. It would come to resemble the classical version of the long run aggregate supply curve (LRAS).
The classical version of the LRAS is vertical. It assumes that, over time, prices and wages will adjust until they are in balance with one another. In the short term, this is not possible. This is known as the “sticky wage” explanation for why the SAS curves upward. In this model, workers are often working on contracts that cannot easily be changed. Their contracts specify their wages and so wages cannot change quickly to adjust to price changes.
But if wages could change quickly (or even constantly) to adjust to price changes, this reason for an upward-sloping SAS curve would disappear. The SAS would come to resemble the classical LRAS because the process of adjustment that happens in the long term could happen in a much shorter period of time.