ECS4861
Assignment 3 2025
Unique Number:
Due Date: 13 August 2025
1. INTRODUCTION
Understanding why unemployment can persist even when people are willing to work is a key
question in economics. One important explanation comes from Keynesian economics, which
argues that involuntary unemployment can happen when wages and prices do not adjust
quickly enough to changes in economic conditions. This condition is known as wage and
price rigidity. In simple terms, it means that wages and prices can remain stuck, even when
the economy needs them to change. This can cause mismatches in the labor market, where
people want to work but employers are not hiring.
This essay explores the idea that wage and price rigidities are necessary for Keynesian
economics to explain why involuntary unemployment exists. It begins with a look at Keynes’s
original theory, then examines the orthodox Keynesian school, and finally considers the
contributions of New Keynesian economics. The goal is to explain how these different
schools of thought understand wage and price rigidity and how it relates to real-world
unemployment.
Terms of use
By making use of this document you agree to:
Use this document as a guide for learning, comparison and reference purpose,
Terms of use
Not to duplicate, reproduce and/or misrepresent the contents of this document as your own work,
By making use of this document you agree to:
Use this document
Fully accept the consequences
solely as a guide forshould you plagiarise
learning, reference,orand
misuse this document.
comparison purposes,
Ensure originality of your own work, and fully accept the consequences should you plagiarise or misuse this document.
Comply with all relevant standards, guidelines, regulations, and legislation governing academic and written work.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is" without any express or
implied representations or warranties. The author accepts no responsibility or liability for any actions taken based on the
information contained within this document. This document is intended solely for comparison, research, and reference purposes.
Reproduction, resale, or transmission of any part of this document, in any form or by any means, is strictly prohibited.
, +27 67 171 1739
1. INTRODUCTION
Understanding why unemployment can persist even when people are willing to work
is a key question in economics. One important explanation comes from Keynesian
economics, which argues that involuntary unemployment can happen when wages
and prices do not adjust quickly enough to changes in economic conditions. This
condition is known as wage and price rigidity. In simple terms, it means that wages
and prices can remain stuck, even when the economy needs them to change. This
can cause mismatches in the labor market, where people want to work but
employers are not hiring.
This essay explores the idea that wage and price rigidities are necessary for
Keynesian economics to explain why involuntary unemployment exists. It begins with
a look at Keynes’s original theory, then examines the orthodox Keynesian school,
and finally considers the contributions of New Keynesian economics. The goal is to
explain how these different schools of thought understand wage and price rigidity
and how it relates to real-world unemployment.
2. CONCEPT OF WAGE AND PRICE RIGIDITY
2.1. Understanding Wage Rigidity
Wage rigidity means that wages do not adjust quickly when there are changes in the
economy. One major form is downward wage rigidity, where it is hard for employers
to reduce wages even when demand for labour falls. This happens for many
reasons. Workers do not like pay cuts and may resist through strikes or quitting.
Labour unions also play a role by negotiating fixed wages in contracts. Government
rules like minimum wage laws can stop wages from falling below a certain level.
Social norms and fairness also matter, as employers fear losing morale and
productivity if they cut pay.
2.2. Understanding Price Rigidity
Price rigidity means that the prices of goods and services do not change quickly in
response to changes in supply and demand. One reason is menu costs, which are
the costs of changing prices, like printing new menus or re-labelling products. Firms
may also keep prices stable to avoid upsetting customers or damaging brand loyalty.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is"
without any express or implied representations or warranties. The author accepts no responsibility or
liability for any actions taken based on the information contained within this document. This document is
intended solely for comparison, research, and reference purposes. Reproduction, resale, or transmission
of any part of this document, in any form or by any means, is strictly prohibited.
Assignment 3 2025
Unique Number:
Due Date: 13 August 2025
1. INTRODUCTION
Understanding why unemployment can persist even when people are willing to work is a key
question in economics. One important explanation comes from Keynesian economics, which
argues that involuntary unemployment can happen when wages and prices do not adjust
quickly enough to changes in economic conditions. This condition is known as wage and
price rigidity. In simple terms, it means that wages and prices can remain stuck, even when
the economy needs them to change. This can cause mismatches in the labor market, where
people want to work but employers are not hiring.
This essay explores the idea that wage and price rigidities are necessary for Keynesian
economics to explain why involuntary unemployment exists. It begins with a look at Keynes’s
original theory, then examines the orthodox Keynesian school, and finally considers the
contributions of New Keynesian economics. The goal is to explain how these different
schools of thought understand wage and price rigidity and how it relates to real-world
unemployment.
Terms of use
By making use of this document you agree to:
Use this document as a guide for learning, comparison and reference purpose,
Terms of use
Not to duplicate, reproduce and/or misrepresent the contents of this document as your own work,
By making use of this document you agree to:
Use this document
Fully accept the consequences
solely as a guide forshould you plagiarise
learning, reference,orand
misuse this document.
comparison purposes,
Ensure originality of your own work, and fully accept the consequences should you plagiarise or misuse this document.
Comply with all relevant standards, guidelines, regulations, and legislation governing academic and written work.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is" without any express or
implied representations or warranties. The author accepts no responsibility or liability for any actions taken based on the
information contained within this document. This document is intended solely for comparison, research, and reference purposes.
Reproduction, resale, or transmission of any part of this document, in any form or by any means, is strictly prohibited.
, +27 67 171 1739
1. INTRODUCTION
Understanding why unemployment can persist even when people are willing to work
is a key question in economics. One important explanation comes from Keynesian
economics, which argues that involuntary unemployment can happen when wages
and prices do not adjust quickly enough to changes in economic conditions. This
condition is known as wage and price rigidity. In simple terms, it means that wages
and prices can remain stuck, even when the economy needs them to change. This
can cause mismatches in the labor market, where people want to work but
employers are not hiring.
This essay explores the idea that wage and price rigidities are necessary for
Keynesian economics to explain why involuntary unemployment exists. It begins with
a look at Keynes’s original theory, then examines the orthodox Keynesian school,
and finally considers the contributions of New Keynesian economics. The goal is to
explain how these different schools of thought understand wage and price rigidity
and how it relates to real-world unemployment.
2. CONCEPT OF WAGE AND PRICE RIGIDITY
2.1. Understanding Wage Rigidity
Wage rigidity means that wages do not adjust quickly when there are changes in the
economy. One major form is downward wage rigidity, where it is hard for employers
to reduce wages even when demand for labour falls. This happens for many
reasons. Workers do not like pay cuts and may resist through strikes or quitting.
Labour unions also play a role by negotiating fixed wages in contracts. Government
rules like minimum wage laws can stop wages from falling below a certain level.
Social norms and fairness also matter, as employers fear losing morale and
productivity if they cut pay.
2.2. Understanding Price Rigidity
Price rigidity means that the prices of goods and services do not change quickly in
response to changes in supply and demand. One reason is menu costs, which are
the costs of changing prices, like printing new menus or re-labelling products. Firms
may also keep prices stable to avoid upsetting customers or damaging brand loyalty.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is"
without any express or implied representations or warranties. The author accepts no responsibility or
liability for any actions taken based on the information contained within this document. This document is
intended solely for comparison, research, and reference purposes. Reproduction, resale, or transmission
of any part of this document, in any form or by any means, is strictly prohibited.
