Wage-Setting Curve, Price-Setting Curve, and the Labour Market

9.1 of The Economy 1.0 & The Economy #5

Briefly speaking, how will the Firm and the Employee interact?

-To get employees to work hard, firms must set a wage such that an employment rent exists. Thus, the cost of job loss will ensure the worker will put effort into avoiding being fired

-The level of unemployment also affects this interaction - low unemployment suggests that she can find alternative work if needs be.

Briefly speaking, how will the Firm and the Customer interact?

-In setting the price of the good they sell, firms have a trade-off. To sell more or set a higher price?

-Luckily, they can find the markup by finding the point such that the MRS of the iso-profit curve = MRT of the demand curve.

What is the real wage?

-Simply the nominal wage divided by the price level of a standard bundle of consumer goods.

What will HR do when the firm is deciding how to choose the wages, price and employment?

-Must determine the lowest wage it can pay

-Such that it does not undermine workers’ motivation to work, and based on prices of other firms’ products, other wages firms are paying, and the unemployment rate in the economy

-This is the nominal wage

What will marketing do when the firm is deciding how to choose the wages, price and employment?

-Based on the firm’s nominal wage and the shape and position of the demand curve. If it is elastic, it knows there is a lot of competition, and the markup sadly won’t be high

-So the marketing department will find the optimal point of production, which naturally shows the optimal price

What will the production department do when the firm is deciding how to choose the wages, price and employment?

-Finds out how many employees need to be hired in order to produce said output, which is based on what the marketing department has said. This utilised the firm’s production function.

What is the wage-setting curve?

-Gives the real wage necessary at each level of economy-wide employment to give workers incentives to work hard and well

What is the price-setting curve?

-Gives the real wage paid when firms choose their profit-maximising price.