(Consider This) Which of the following best explains why unemployment rises signiﬁcantly during a recession?
A) Wages are sticky both upward and downward.
B) Wages are ﬂexible both upward and downward.
C) Wages are ﬂexible upward but sticky downward.
D) Wages are sticky upward but ﬂexible downward.

Question

Quizplus · Accepted Answer

During a recession, firms typically face a decrease in demand for their goods or services. As a result, they may need to lay off workers to reduce their costs. However, if wages are sticky both upward and downward, then workers may not accept pay cuts even if firms are struggling to stay in business. On the other hand, if wages are flexible both upward and downward, firms could easily reduce wages to reduce their costs, but workers would also be quick to demand higher wages once conditions improve. Therefore, the best explanation is that wages are flexible upward but sticky downward, meaning that firms can easily raise wages during good times, but workers are reluctant to accept pay cuts during bad times.

(Consider This) Which of the Following Best Explains Why Unemployment