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8 May, 2015 - 11:28

Keynes argued that prices and wages are not flexible as the classical theory asserts. Wages tend to be rigid on the down side because workers will not accept wages which do not permit them to live adequately; this is reinforced by the actions of unions. If wages are too low, unemployment will exist. In the case of prices, firms producing large tag items prefer to cut production and lay off workers than cut price. Their monopoly power often permits them to act that way.

Since the mid l980's, there have been several instances where employees have accepted wage give-backs: for instance, in the airline and steel industries. Aside from these exceptions, wage decreases are extremely rare. The general pattern is one of continuous increases, at least, to match cost of living increases.