Adjustment Asymmetry

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Adjustment Asymmetry

Boom conditions are characterized by high demand for labor which coupled with labor shortage. Lead to higher wages, increasing labor costs per unit of output and rapidly rising prices. In fact, wages may be rising faster than increase in productivity due to excessive labor demand thus causing increase in per unit production cost and the consequent upward (leftward) shift in the SRAS curve.

However, during the slump or recession when labor demand is unusually low wages may not fall rapidly, they may in fact not fall at all or may even be mildly rising. There is a certain amount of stickiness or resistance to downward revision of wages and prices; they do not fall as quickly or as sharply as is the case with upward movement of price and wages. Experience of many countries in Europe and Canada suggest that downward pressures on wages are not as quick as the upward pressure even during severe recessions. Thus the per unit labor cost of output does not fall much. Therefore, even under recessionary conditions, the downward (rightward) shift in the SRAS curve is very small.

This shows that there is an asymmetry in the way in which the economy responds to each of the output gaps. Both upward and downward adjustments to unit labor cost do occur, but there is a difference in the speed at which they typically operate. Excess demand can cause unit labor cost to rise very rapidly; excess supply normally causes unit labor costs to fall only slowly.


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