A look at macroeconomic data across countries reveals that when economies experience recessions, unemployment rates rise, but wages fall very little, if at all. Which of the following is most likely to support this observation?
A) Wages are determined by the interaction of the forces of labor demand and supply.
B) The demand for labor is derived demand and hence does not fall during recessions.
C) The labor market usually exhibits perfect competition.
D) The labor supply curve becomes perfectly inelastic during recessions.
E) Long term labor contracts make the wage rates sticky downwards.

Question

Quizplus · Accepted Answer

Long term labor contracts often contain clauses that make the wage rates "sticky" downwards. This means that even in times of recession, when unemployment rates rise, wages do not fall as much as they would if wages were completely responsive to changes in labor demand and supply. As a result, wages remain relatively stable during recessions, while unemployment rates rise.

A Look at Macroeconomic Data Across Countries Reveals That When