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

 
6) Wage Setting: In modern time, wages are not set by daily 
basis. The firm and its worker can not spend every day 
negotiating terms and conditions of employment. Bargaining 
is a costly process. Therefore, wage agreement take place 
after a period of time through negotiation between labour 
and management. The settled wage is finalised by wage 
contract. Wage contract remain valid for a period of time say 
for three to four years. Thus wages are inflexible in the long 
period. 
 
7) Wage agreement between firm and worker ensure that 
wages are not drastically cut during recession and increases 
sharply during inflation. 
Such mutual commitment insulates both the firm and the 
worker from the adverse market conditions. 
The firm may lose out in times of excess product which then 
to raise wages. 
Worker interests are also served by having wage contract. 
They find that wage do not go down during times of recession. 

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9.6 SHORT RUN, MEDIUM RUN AND LONG RUN 
 
There is no unanimity among economists about time period 
taken for wage adjustment. This will differ from country to country 
and time to time. A general proposal is three months for short run. 
One to two years for medium term and four to six years for long 
run. 
In the short run, wage is given and constant. It being adjusts 
in medium run and become flexible in long run. 
To conclude, it is not in interest of firm to change working 
force and money wage along with the changes in market condition. 
The firm have to face hiring cost, firing cost and training cost. 
Further such frequent changes will demoralise work force 
and adversely affect the commitment and efficiency of labour. 
Hence wage agreement is in interest of firms and workers. 
Inference is that the prices and wages take time to adjust 
wages increases slowly. Therefore, AS curve in short run is not 
vertical but rising upwards. It may become vertical in long period. 
Hence, Classical AS curve possible in long period.