A company's workforce consists almost entirely of full time workers earning $15 per hour. During an economic downturn, a company reduces everyone's hours to 30 hours per week but keeps their pay at $15 per hour.
a. In this example, are wages sticky or flexible? Explain.
b. Why might the company reduce hours rather than pay?
c. Is this scenario more consistent neoclassical theory or Keynesian theory? How can you tell? (Hint: look at your answer to (a).)
d. Why might reducing everyone's hours by 25% be better for the economy than laying off 25% of their employees? (Hint: consider the effects of unemployment on worker productivity.)