See figure 11-5. However this adjustment takes place very slowly. There are several cases of deflation before WWII, but none since. Why deflation hasn t happened in our recent times is up for debate. Legal restraints like minimum wage laws, union contracts, and government rules that create floors.
Psychological People are resistant to wage cutting.
They may quit if the boss suggested such a thing. Business cycles have been less severe in post WWII than before, so there is less need for wage reductions. Workers may have decided to wait out the bad times rather than take wage and price reductions they would regret later. You get what you pay for . Firms that would reduce their employees wages would end up with less productive workers, so firms will maintain higher wages in hopes of keeping their best workers.