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What is wage setting?
wage-setting curve. The curve that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well. Price-setting curve. The curve that gives the real wage paid when firms choose their profit-maximizing price.
What is the price setting relation?
Firms and price setting. If a firm has some market power it has the ability to have some control over the prices it charges. This gives us the price-setting relation: This is basically saying that firms charge some form of 'mark-up' (denoted by. ) over the wages they pay.
What is the wage setting relationship?
The Wage-Setting Relation. The natural rate of unemployment is the unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting. Wages, Prices, and the. Natural Rate of. Unemployment.
What is the real wage as determined by the price setting equation?
What is the real wage, as determined by the price-setting equation? W/P=1/(1+)=1/1.05=0.952 b. What is the natural rate of unemployment? Wage setting: u=1-W/P=1-0.952=4.8% c.
How does the natural rate of unemployment vary with the markup?
The natural rate of unemployment varies not only with the markup, but also with the factors that affect wage setting, z. Therefore, holding the markup constant, an increase in z, will cause for the natural rate of unemployment to increase with increases in z and decrease with decreases z.
Why is the wage setting curve downward sloping?
Hence the WS curve is upward sloping. More generally, when unemployment is lower, workers are in a stronger position in the labor market and can negotiate a higher wage. b) With efficiency wages, as unemployment falls, the firm must raise the wage because the worker can more easily find work elsewhere.
What shifts the wage setting curve down?
A cut in the unemployment benefit would shift the best response function to the left. However, that would mean that the equilibrium wage falls for a given unemployment rate, and lower the wage-setting curve. This reduces the equilibrium wage for a given unemployment rate, resulting in a lower wage-setting curve.
Why do wages go up when unemployment goes down?
If workers expect prices to rise, they will demand higher wages so that their real (inflation-adjusted) wages are constant. As inflation accelerates, workers may supply labor in the short term because of higher wages leading to a decline in the unemployment rate.
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