Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

9.5 LABOUR MARKET AND WAGE BEHAVIOUR
 
The Classical economist believed that the price and wages 
are fully flexible and the output always remains at full employment. 
Hence a curve is vertical in relation to price level. 
But modern economist have questioned the Classical 
preposition and stated that wages are sticky in short period. The 
reasons are given below: 
1) Hiring and firing of labour is costly for firm: It is 
expensive for firm to hire and fire worker. When there is 
excess demand, the firm increases the production by using 
the existing staff intensively (by asking the labour to work 
over time). When the demand is low, the firm do not 
terminate the services of worker immediately due to the 
termination cost. It includes the payment of terminal benefits. 
Further, if workers are terminated, hiring of new worker at a 
latter time involve recruitment and training cost. 

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2) Firm give greater importance to long term co-operation: 
It is more important than the short gain from reducing the 
wage. 
 
3) A new worker is poor substitute for an experienced staff. 
Therefore, if long term prospects are very bad, the firm will 
terminate the experienced worker. 
 
4) The reputation of a firm as a stable employer is very 
important to attract more efficient and skilled worker in long 
run. Hence, firm would not like to follow fire and hire policy 
frequently. 
 
5) Adjustment in labour input: Labour input of a firm is the 
total number of labour house which employs in a given 
period. Labour input may increased either by increased 
number of hours (overtime) by increasing number of workers 
or by a combination of two. Similarly when demand fall, the 
firm react by abolishing the over time and by reducing 
working week. If demand does not recover, the firm may lay 
off some of the worker. Lay off is only a temporary 
separation of the worker from firm.