The Road to Recession
When the economy finds a negative impact on the demand, the flexibility, (or lack thereof) of the prices determines both the severity as well as the duration of any recession that could come up. If the prices were always flexible, or if they could change in seconds or minutes after an impact, the economy would go from point A to point C and everything would be just fine. However, if the prices remain put for a period of time, the economy enters into a recession as it moves from point A to point B, before the prices end up going down and take it again to product with full employment.
In actual life, the truth is that the prices change somewhat slowly, or, as experts say, are rigid. The interesting thing is that they tend to be more rigid when they are down then when they are up, in other words the prices have more difficulty going down then they do going up.
The main one to blame here seems to be specific prices: salaries. Salaries are the prices that employers need to pay their employees for their work. Contrary to other prices in the economy, people become emotionally attached to their salaries and to how they change with time.
Most importantly, employees do not like to see their salaries get reduced. When it comes to their salaries, they have a very strong sense of equity, and as a result, they generally react very strongly against any reduction of the same that are not working as hard. So, in general the administrators consider that it is contra productive to lower the salaries even when a company is losing money and needs to reduce its costs.
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