Wage setting and price relationship ultimatums

Request PDF on ResearchGate | Ultimatum Games and Wages: Moreover, the implications of the implicit bar¬gain for the wage setting process are The Effect of Glucose Consumption on Customers' Price Fairness Perception .. function of wage for mid-range wage offers, but this relationship is not. Request PDF on ResearchGate | Wage Differentials and Social Comparison: An Experimental Study of Interrelated Ultimatum Bargaining | Equal pay for equal that in our setting, i.e. in a setting where the wage offer relation is endogenously .. of the ultimatum game that provides second-movers with a marginal-cost-free . rent-sharing approach to wage determination under collective bargaining, whether the efficiency-enhancing effect of decentralized bargaining is attained at the cost . real-world situations in which worker-employer relationships are stable.

Wages and profits in the whole economy We have seen in Figure 9. The value of the real wage consistent with the markup does not depend on the level of employment in the economy, so it is shown as in Figure 9.

Point B in Figures 9. If the real wage is too high, it means the markup is too low. Point B The firm will raise its price so as to move towards higher profits at point B. The increased price will mean that fewer goods are sold, and as this is true of all firms, total employment falls.

Point C Below the price-setting curve, at a point like C, firms lower their prices and hire more people. Given economy-wide demand, total profits are lower at A and C for firms facing the demand curve in Figure 9. Now think about point A in Figure 9. Follow the steps in Figure 9. The rise in price and the reduction in employment are indicated by the arrow at point A in Figure 9.

It points down because the rise in prices implies a fall in the real wage, that is, the nominal wage divided by the price. It points left because a price increase implies a fall in output and employment. Below the price-setting curve, at a point like C, firms lower prices and hire more people. What will determine the height of the price-setting curve? There are many influences once we consider the impact of public policies as we will see later in this unitbut two things have an important influence on the price-setting curve, even in the absence of government intervention: The intensity of competition in the economy determines the extent to which firms can charge a price that exceeds their costs, that is, the markup.

The less the competition, the greater the markup. Since this leads to higher prices across the whole economy, it implies lower real wages, pushing down the price-setting curve. For any given markup, the level of labour productivity—how much a worker produces in an hour—determines the real wage. To understand more about the price-setting curve, read the Einstein at the end of this section. At point A, the markup is too high, and therefore the firm will raise its price.

This leads to lower demand for the good and hence lower employment towards B. At point C, the real wage is too low and the markup is too high.

Therefore the firm is able to increase profit by lowering prices and hiring more workers. Higher competition implies a lower price-setting curve.

For any given markup, higher labour productivity implies a lower price-setting curve, which means a lower real wage. At point A, the real wage is too high, which means that the markup is too low. The rest of the statement is correct. Point B is the profit-maximizing point.

The Economy: Unit 9 The labour market: Wages, profits, and unemployment

Therefore the firm is able to increase its profit by moving from C to B, by lowering its price which reduces the markup and increases the real wage and hiring more workers. Higher competition implies lower markup. This reduces the profit per worker.

Since this leads to lower prices across the whole economy, it implies higher real wages, pushing up the price-setting curve. Higher labour productivity means a higher average product of labour curve. For any given markup this means a higher price-setting curve, which means a higher real wage. Einstein The price-setting curve There are several steps to show how the price-setting curve for the economy as a whole results from the decisions of individual firms. The firm pays the worker a wage W in dollars.

Both labour productivity and wages can be measured per hour, per day or per year. In our numerical examples, we typically use hourly wages and productivity.

The unit labour cost is the wages paid to hire the amount of labour to produce one unit of the good. This is defined as: Recall from Unit 7 that the firm chooses its price so that the markup is inversely proportional to the elasticity of the demand curve it faces: In words, this says: When the firm sets its profit-maximizing price, this splits output per worker into the part that goes to employees as wages and the part that goes to owners as profits.

Since she buys many different goods and services, this depends on prices set by the firms throughout the economy, not just her own firm. We call the average price of the goods and services the worker consumes, P, which is an average of the different levels of p set by individual firms across the economy.

The real wage is the nominal wage divided by the economy-wide price level, P. Profits, wages, and the price-setting curve We assume that the entire economy is made up of firms facing competition conditions similar to the single firm we have just studied. This means the price-setting problem from Step 1 applies to all firms in the economy, so we can use the price-setting equation to determine the economy-wide real wage: In words, this says that: This is the wage indicated by the price-setting curve.

Equilibrium in the labour market. In this situation, there is no work done and no profits, so nobody is hired: These shaded points are not feasible. The equilibrium of the labour market is where the wage- and price-setting curves intersect. This is a Nash equilibrium because all parties are doing the best they can, given what everyone else is doing. Each firm is setting the nominal wage where the isocost curve is tangent to the best response function Unit 6and is setting the profit-maximizing price Unit 7.

Taking the economy as a whole, at the intersection of the wage and price setting curves point X: The firms are offering the wage that ensures effective work from employees at least cost that is, on the wage-setting curve. HR cannot recommend an alternative policy that would deliver higher profits.

Employment is the highest it can be on the price-setting curvegiven the wage offered. The marketing department cannot recommend a change in price or output. Those who have jobs cannot improve their situation by changing their behaviour. If they worked less on the job, they would run the risk of becoming one of the unemployed, and if they demanded more pay, their employer would refuse or hire someone else.

Those who fail to get jobs would rather have a job, but there is no way they can get one—not even by offering to work at a lower wage than others.

Unemployment as a characteristic of labour market equilibrium We have shown that unemployment can exist in Nash equilibrium in the labour market. This is the Nash equilibrium of the labour market because neither employers nor workers could do better by changing their behaviour. This is the Nash equilibrium of the labour market where neither employers nor workers could do better by changing their behaviour.

We now show why there will always be unemployment in labour market equilibrium, using the argument from Unit 6. This is called equilibrium unemployment. Unemployment means that there are people seeking work but not finding it. This threat can be used to prevent shirking or " moral hazard ". By paying above-market wages, the worker's motivation to leave the job and look for a job elsewhere will be reduced.

This strategy makes sense because it is often expensive to train replacement workers. If job performance depends on workers' ability and workers differ from each other in those terms, firms with higher wages will attract more able job-seekers, and this may make it profitable to offer wages that exceed the market clearing level.

Efficiency wages may result from traditions. Akerlof's theory in very simple terms involves higher wages encouraging high morale, which raises productivity. In developing countriesefficiency wages may allow workers to eat well enough to avoid illness and to be able to work harder and even more productively. The model of efficiency wages, largely based on shirking, developed by Carl Shapiro and Joseph E.

Stiglitz has been particularly influential.

Efficiency wage

Shirking[ edit ] In the Shapiro-Stiglitz model workers are paid at a level where they do not shirk. This prevents wages from dropping to market clearing levels.

Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. The curve for the no-shirking condition labeled NSC goes to infinity at full employment. The shirking model begins with the fact that complete contracts rarely or never exist in the real world.

Thus the payment of a wage in excess of market-clearing may provide employees with cost-effective incentives to work rather than shirk. But since all firms do this the market wage itself is pushed up, and the result is that wages are raised above market-clearing, creating involuntary unemployment.

This creates a low, or no income alternative which makes job loss costly, and serves as a worker discipline device. Shapiro and Stiglitz point out that their assumption that workers are identical e. Shapiro—Stiglitz theory The shirking model does not predict counterfactually that the bulk of the unemployed at any one time are those who are fired for shirking, because if the threat associated with being fired is effective, little or no shirking and sacking will occur.

Instead the unemployed will consist of a rotating pool of individuals who have quit for personal reasons, are new entrants to the labour market, or who have been laid off for other reasons. Pareto optimalitywith costly monitoring, will entail some unemployment, since unemployment plays a socially valuable role in creating work incentives.

But the equilibrium unemployment rate will not be Pareto optimal, since firms do not take into account the social cost of the unemployment they help to create. One criticism of this and other flavours of the efficiency wage hypothesis is that more sophisticated employment contracts can under certain conditions reduce or eliminate involuntary unemployment.

Lazeardemonstrates the use of seniority wages to solve the incentive problem, where initially workers are paid less than their marginal productivityand as they work effectively over time within the firm, earnings increase until they exceed marginal productivity. The upward tilt in the age-earnings profile here provides the incentive to avoid shirking, and the present value of wages can fall to the market-clearing level, eliminating involuntary unemployment.

Lazear and Moore find that the slope of earnings profiles is significantly affected by incentives. Obvious incentives would exist for firms to declare shirking when it has not taken place. In the Lazear model, firms have obvious incentives to fire older workers paid above marginal product and hire new cheaper workers, creating a credibility problem. The seriousness of this employer moral hazard depends on the extent to which effort can be monitored by outside auditors, so that firms cannot cheat, although reputation effects e.

Lazear may be able to do the same job.

Wage-Setting, Price-Setting Relations

Labor turnover[ edit ] On the labor turnover flavor of the efficiency wage hypothesis, firms also offer wages in excess of market-clearing e. SalopSchlichtStiglitzdue to the high cost of replacing workers search, recruitment, training costs. These models can easily be adapted to explain dual labor markets: Again, more sophisticated employment contracts may solve the problem.

Selection[ edit ] In selection wage theories it is presupposed that performance on the job depends on "ability", and that workers are heterogeneous with respect to ability. The selection effect of higher wages may come about through self-selection or because firms faced with a larger pool of applicants can increase their hiring standards and thereby obtain a more productive work force.

If there are two kinds of firm low and high wagethen we effectively have two sets of lotteries since firms cannot screenthe difference being that high-ability workers do not enter the low-wage lotteries as their reservation wage is too high. Thus low-wage firms attract only low-ability lottery entrants, while high-wage firms attract workers of all abilities i.

Thus high-wage firms are paying an efficiency wage — they pay more, and, on average, get more see e. Malcolmson ; Stiglitz ; Weiss However, the assumption that firms are unable to measure effort and pay piece rates after workers are hired or to fire workers whose output is too low is quite strong.

Firms may also be able to design self-selection or screening devices that induce workers to reveal their true characteristics. If firms can assess the productivity of applicants, they will try to select the best among the applicants.

Efficiency wage - Wikipedia

A higher wage offer will attract more applicants, and in particular more highly qualified applicants. This permits a firm to raise its hiring standard and thereby enhance the firm's productivity. Sociological models[ edit ] Fairness, norms, and reciprocity[ edit ] Standard economic models " neoclassical economics " assume that people pursue only their own self-interest and do not care about "social" goals " homo economicus ".