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Wage-Setting, Price-Setting Relations

wage equation - W = PeF(u,z)  

  • expected price level - Pe, determines nominal wage
    • firms/workers more interested in real wage (W/P)
    • estimated to account for future price changes
  • unemployment (u) - inversely related to wages
    • u increases >> less bargaining power >> workers ok w/ lesser wages
  • z - catch-all variable to account for other factors (ie. unemployment insurance, structural change, minimum wage legislation, etc)

labor production - output Y considered proportional to size of employment  

  • Y = AN
    • Y = output, A = labor productivity, N = employment
    • leads to simpler relation Y=N (redefining units so that A=1)
  • P = (1+m)W
    • m = mark-up of price over cost (equal to 0 in perfectly competitive markets)
    • in this simplified situation, labor considered to be only factor of production
  • wage-setting relation - W/P = F(u,z)
  • price-setting relation - W/P = 1 / (1+m)

 

  • wage-setting relation
    • decreases as unemployment increases
  • price-setting relation
    • doesn't depend on the unemployment rate
Subject: 
Economics
Subject X2: 
Economics

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