AP MacroeconomicsAggregate Demand & Supply
Sticky-Wage Theory of SRAS
The sticky-wage theory says SRAS slopes upward because nominal wages adjust slowly, so a higher price level raises firm profits and output in the short run.
Because many wages are fixed by contracts or norms, they do not change immediately when the price level rises. When output prices increase but wages stay put, real labor costs fall and profit margins widen, so firms hire more and expand production. This effect is temporary: once wage contracts are renegotiated to reflect higher prices, real wages and output return to the long-run level, which is why LRAS is vertical. It is one of three standard explanations (along with sticky-price/menu-cost and misperceptions) for the upward-sloping SRAS.