ch 6 econ notes

When the labor market exceeds full employment, wages tend to increase due to greater competition for labor.
If inflation is expected, workers will demand raises to maintain their purchasing power, leading to overall increased wages. This reaction to inflation expectations can create a wage-price spiral, where higher wages lead to increased costs for businesses, potentially fueling further inflation.
In cases of expected deflation, employers may preemptively decrease wages to cut costs, leading to layoffs. This deflationary environment can create a downward spiral in the economy, reducing employee morale and productivity.

Wages are impacted by both the current state of the labor market and inflation expectations. A tight labor market tends to push wages upward as firms compete for a limited pool of eligible workers.
During periods of high employment and inflation expectations, workers are more likely to receive raises as companies try to attract and retain talent.
Conversely, in a recession, employers may need to cut costs, leading to wage decreases, particularly prevalent in a deflationary environment where the economic outlook is grim.

The Phillips Curve illustrates the inverse relationship between unemployment and wage changes over time. When unemployment is low, wages tend to rise as employers compete for workers, while high unemployment generally puts downward pressure on wage growth.
Employment levels relative to the natural rate can affect how quickly wage changes occur. Wage adjustments may lag behind shifts in economic conditions, reflecting the inertia in labor contracts and market expectations.

Definition: Efficiency wages are wages paid above market rates to incentivize productivity and reduce shirking, which occurs when employees exert less effort than is expected.
Paying higher wages can lead to positive outcomes such as increased employee retention, better applicant quality, and enhanced motivation. Effective supervision is costly; efficiency wages help companies mitigate these costs by ensuring higher levels of productivity and commitment from workers.