Asymmetric Wage-Price Reaction Functions

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	Asymmetric Wage-Price Reaction Functions: Models illustrating the Keynesian theory that wages and prices are “stickier” downwards than upward. Wages are normally assumed to adjust to shocks (disruptions to a market that yield shortages or surpluses) less rapidly than prices do. Abba Lerner is credited with the graphical model of wage-price asymmetries shown below. __________________________________________________________________________________________________________________________
	These Lerner Wage-Price Reaction Functions show that wages and prices do not adjust to changes in demand or supply instantaneously or symmetrically, but instead adjust in accord with the relative rates of excess demand (XD) or excess supply (XS) experienced in markets. In accord with Keynesian theory, wages adjust to given amounts of pressure less rapidly than prices do. Consequently, shortages or surpluses of labor will last longer than similar shortages or surpluses of goods. The asymmetry of adjustment means that surpluses last longer than shortages, especially in labor markets, in which surplus labor translates into unemployment. Thus, deflationary pressure poses relatively more of problem than does a similar amount of inflationary pressure.
________________________________________________________________________________________________________________________________________________ Author: Ralph Byrns
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