Sticky economics: Encyclopedia II - Sticky economics - Examples of stickiness

Sticky economics - Examples of stickiness

Consider the jobless recovery of 2004. Many firms, during the recession, laid off workers. Yet many of these same firms were reluctant to begin hiring, even as the economic situation improved. The result was weak job growth during the recovery: Even when net job growth was positive, it failed to keep pace with the growing labor force.

Wages, prices, and employment levels can all be sticky. Normally, a variable oscillates according to changing market conditions, but when stickiness enters the system, oscillations in one direction are favored over the other, and the variable exhibits "creep"-- it gradually moves in one direction or another. This is also called the "ratchet effect". Over time a variable will have ratcheted in one direction.

For example, in the absence of competition, firms rarely lower prices, even when production costs decrease (i.e. supply increases) or demand drops. Instead, when production becomes cheaper, firms take the difference as profit, and when demand decreases they are more likely to hold prices constant, while cutting production, than to lower them. Therefore, prices are sometimes observed to be sticky downward, and the net result is one kind of inflation.

Prices in an oligopoly can often be considered sticky-upward. The kinked demand curve, resulting in elastic price elasticity of demand above the current market clearing price, and inelasticity below it, requires firms to match price reductions by their competitors to maintain market share.

Adapted from the Wikipedia article "Examples of stickiness", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki