Wage setting curve in an economy

Global growth is picking up somewhat after a number of weak years.

Wage setting curve in an economy

Hiring labour is different from buying other goods and services, and the contract between the employer and the employee is incomplete.

It does not cover what the employer really cares about, which is how hard and well the employee works. In economics, employment is modelled as a principal the employer interacting with an agent the employee.

The principal—agent model can be used to study other relationships with incomplete contracts, such as the interaction between a lender and a borrower. Firms do not pay the lowest wages possible. They set wages so that employees earn economic rents, to motivate them to work effectively, and stay with the firm.

Working together in firms brings mutual gains: But rents also lead to involuntary unemployment in the economy.

Until a single company, Foxconn, produced every iPhone and iPad in factories in China, mainly so that Apple could take advantage of lower costs, including wages. The components of the iPhone and iPad for the most part do not come from China, but are sourced from around the world.

Components such as the flash memory, display module, and touch screen are made by a number of different companies including Toshiba and Sharp in Japan.

Wage setting curve in an economy

Like other firms, Apple makes profits by finding the supplier that can provide inputs at the lowest cost, whether the input is a component or labour, wherever in the world that supplier may be located. The cost of producing the iPhone is far lower than the price Apple charges: It can take place within a multinational company or may involve outsourcing production to other firms.

Apple is not alone in outsourcing or offshoring production to countries that are not the main market for the goods produced. In most manufacturing industries, firms based in rich countries have transferred a significant proportion of production, which was previously done by local employees, to poorer countries where wages are lower.

But Apple and other firms are looking for more than cheap labour. Other industries, particularly garment manufacturing, have relocated primarily to low-wage economies.

Also, in developing countries, additional business costs such as health and safety rules are far lower, and environmental regulations are often less strict. Apple, Samsung, and Toshiba are business organizations called firms.

Not everyone is employed in a firm. For example, many farmers, carpenters, software developers or personal trainers work independently, as neither employee nor employer. While some people work for governments and not-for-profit organizations, the majority of people in rich nations make their living by working in a firm.

Firms are major actors in the economy and we will use this and the next unit to explain how they work. A firm is often referred to as if it were a person: But while firms are actors—and in some legal systems are treated as if they were individuals—firms are also the stage on which the people who make up the firm employees, managers, and owners act out their sometimes common but sometimes competing interests.

Wage setting curve in an economy

We have already seen, in earlier units, the importance of work, and firms, in the economy: Work is how people produce their livelihoods. In deciding how much time to spend working, people face a trade-off between free time and the goods that they can produce, or the wage income that they can earn.

Introduction and key findings

Production, wages, and living standards have grown through the innovation and adoption of new technologies by firms.

There are potential gains to all concerned from individuals specializing in tasks for which they have a comparative advantage. The division of labour may be coordinated through market exchange. In Unit 1, specialization in grain and apples was coordinated through buying and selling grain and apples.

In Unit 5, the interaction between Angela and Bruno was coordinated by a contract trading the use of land for a share of the crop. Sometimes, however, people need to work together to produce something that will benefit all of them, and their success will depend on their preferences and strategies to discourage free riding.

Another way that work may be coordinated and combined with other inputs is by organization within a firm. The firms in Unit 2 produced cloth, deciding how much coal to buy and how many workers to employ.

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We illustrated each of these conclusions using models that illuminate some aspects of the economy, while setting aside others. In Unit 2, we did not consider how the length of the working day was determined while the economy was growing.

In Unit 3, we did not model how the wage or the marginal rate of transformation of free time into goods was determined when we analysed a decision on working hours. In Unit 2 we told a story of conflicting interests over wages, but we did not model strategic interaction and bargaining until Units 4 and 5.

And in Unit 5 we used the story of just two imaginary people called Bruno and Angela to model how bargaining may affect the Pareto efficiency and fairness of allocations.is one way of deriving the wage-setting curve from a microeconomic foundation.

We label the set of tangencies between the labour demand and union indifference curves, the “wage-setting” or -curve.

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Filling in gaps: deriving the sectoral labour demand curve from the sectoral demand for output. This is really good. But I also think there’s a reason our base cultural values are used as a tiebreaker – they’re designed to minimize the average actual distaste the average person has with the status quo (You can’t have a cultural norm if too many people object to it too strongly, it ends up changing).

Cabotage 1.

Navigation and trade by ship along a coast, especially between ports within a country. Since the Jones Act, this has been restricted in the U.S. to domestic shipping companies. 2. Air transportation within a country. May 17,  · The wage setting relationship is described and factors that influence the nominal wages are identified and explained.

These factors are the price level (P). Introduction and key findings. Income inequality and slow growth in the living standards of low- and moderate-income Americans have become defining features of today’s economy, and at their root is the near stagnation of hourly wage growth for the vast majority of American workers.

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