Sticky (economics)

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Sticky is a term used in the social sciences and particularly economics used to describe a situation in which a variable is resistant to change. For example, nominal wages are often said to be sticky. Market forces may reduce the real value of labour in an industry, but wages will tend to remain at previous levels. This can be due to institutional factors such as price regulations, legal contractual commitments (eg office leases and employment contracts), labour unions, human stubbornness, or self-interest. Stickiness normally applies in one direction. For example, a variable that is "sticky downward" will be reluctant to drop even if conditions dictate that it should.

Economists tend to cite four possible causes of price stickiness: menu costs, money illusion, imperfect information with regards to price changes, and fairness concerns. Robert Hall cites incentive and cost barriers on the part of firms to help explain stickiness in wages.

1 Examples of stickiness
2 Impact during Deflation
3 External links
4 References

[edit] Examples of stickiness

Consider the jobless recovery of the United States 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.

Note: For the general discussion of asymmetric upward- and downward-stickiness with respect to upstream prices see an article on asymmetric price transmission.

[edit] Impact during Deflation

During an economy wide monetary deflation the downward stickiness of nominal prices such as wages and office leases can cause the destruction of business viability. In extreme cases the only way for businesses to escape contractual commitments (office leases and employment contracts) in such a situation is to declare bankruptcy. An increase in bankruptcies is sometimes cited as indicative of deflationary forces at work in the economy. It is only after such bankruptcies have transpired that consumer prices can move downward to align with the changed value of cash.