What does the relative-wage theory suggest as a reason for the presence of downward wage rigidity?

Multiple choice question for Aggregate Supply, Unemployment And Inflation. Select an option, then review the explanation below.

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Workers in a particular sector resist pay reductions unless they see comparable cuts happening in other sectorsLabor agreements that fix employee wages for durations typically ranging from one to three yearsImplicit understandings between employees and employers that wages will remain unchangedCompanies deliberately maintaining wages above equilibrium to motivate employeesNone of the above

Explanation

The relative-wage explanation highlights that employees in one industry tend to oppose wage decreases unless they are confident that similar wage reductions are being applied across other industries. This social comparison mechanism helps explain why wages tend to be sticky downward. Other factors like fixed-term contracts, informal agreements, or firms’ strategic wage setting relate to different explanations for wage rigidity.

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What does the relative-wage theory suggest as a reason for the presence of downward wage rigidity?

Explanation

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