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 [1]
Subject X2:
Economics [1]