Equilibrium Wage

11 Key excerpts on "Equilibrium Wage"

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  eBook - PDF

  Fundamentals of Labor Economics

  • Thomas Hyclak, Geraint Johnes, Robert Thornton, , Thomas Hyclak, Thomas Hyclak, Geraint Johnes, Robert Thornton(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  156 Chapter 7 Labor Market Equilibrium The market supply and demand curves represent the sum of all the potential suppliers and demanders of a particular type of labor. Normally, this means that the demand and supply curves are aggregated horizontally—summing, at each value of the real wage, the demand for labor across all firms and the supply of labor across all workers. The supply of labor is limited by the number of people who have the skills and experience required for the type of job under consideration. The demand for labor adds up the demand of firms in all industries that use a particular type of worker. For example, manufacturing firms and schools are both potential buyers in the labor market for janitors, maintenance electricians, or accountants. The equilibrium real wage is the level of w/p at which the quantity demanded of labor equals the quantity supplied. In Figure 7.1, the equilibrium values are denoted as (w/p) * and L * . Suppose the current real wage is at (w/p) 1 . At this real wage, the quantity demanded exceeds the quantity supplied (L 1 D . L 1 S ), and individual firms will have an incentive to bid up the nominal wage w (thus raising the real wage w/p) to attract the amount of labor they need. As the real wage rises, the quantity of labor supplied increases and the quantity of labor demanded decreases until these quantities are in balance and there is no further impetus to push up w. If the quantity supplied exceeds the quantity demanded at a given real wage, individ- ual workers will have the incentive to bid down the money wage w to secure employment. This will move the real wage lower, which in turn will bring the quantity supplied and demanded in the market into equilibrium. This description of how equilibrium is arrived at is analogous to the demand and supply models that we use to describe the determina- tion of prices and quantities in other markets.

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  Labor and the Economy

  • Howard M. Wachtel(Author)
  • 2013(Publication Date)
  • Academic Press

    (Publisher)

  This exceeds the number of work units the employer is willing to pay for at that wage. The employer's demand for labor at the wage W x is E d , found by reading off the labor demand curve the number of hours of employ-ment that would be generated at that wage. Thus, the quantity of labor supplied exceeds the amount of labor demanded at the relatively high wage rate of W x . The resulting unemployment (the difference between E d and E s ) will cause work-ers to bid the wage rate down as they compete with each other for the limited employment opportunities available. The wage rate will fall until it reaches W and is once again established at its equilibrium level, where there are no ten-dencies to dislodge it. 4 This process occurs in a perfectly competitive labor market. The concept of a labor market requires some additional elaboration. A market in which labor is exchanged need not be confined to a specific physical location. Economists use the term labor market to refer to a process through which individuals learn about 4 A market wage below the equilibrium will create an excess demand for labor, leading to a bidding war among employers, which will force the wage rate back up to the equilibrium level. Go through the reasoning for this, using a graph like Figure 3-1 to demonstrate the proposition. 26 CHAPTER 3 / WAGE THEORY: LABOR DEMAND available jobs and employers learn about potential employees. This can occur nationally or even internationally. The professor who is teaching you this course was probably hired after a nationwide search. The employee who serves you in your cafeteria was hired in the local labor market after a search that did not extend beyond the confines of the city in which your school is located. Consider what happens when you return home for the summer and look for summer employment. Now you are a supplier of labor attempting to sell your labor services in a competitive labor market.

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  Labour Economics

  • Stephen W. Smith(Author)
  • 2003(Publication Date)
  • Routledge

    (Publisher)

  3 Wage determination and inequality INTRODUCTION

  Bringing together the insights of the previous two chapters we are now in a position to understand how the labour market forces of supply and demand determine the price of labour, the wage. We will also examine the process of labour market adjustment to changes in supply and demand. We will explain what compensating wage differentials are. We will also examine the phenomenon of wage inequality, how it has developed over time and how the situation in the UK compares to other countries. Finally we will assess the significance of minimum wage legislation on the labour market.

  THE SIMPLE LABOUR MARKET

  By now the neoclassical economists view of the labour market should be clear. The demand for labour is roughly equivalent to its marginal productivity. With labour demand responding to changes in wages and to shifts in demand for firms’ products tempered by the existence of non-trivial adjustment costs, supply is determined by the disutility of work relative to the utility of the wages offered. Labour demand is a function of pre-tax real wages whereas labour supply responds to post-income tax real wages. Between them these forces of supply and demand, illustrated in Figure 3.1 , establish the market-clearing wage W*. In such an equilibrium there is no involuntary unemployment because everyone who wants a job at W* has one.

  From this equilibrium position changes can be incorporated to demonstrate the smooth functioning of the labour market. Consider the example contained in Figure 3.2 , where improved labour productivity or an increase in demand for goods would increase the demand for labour from D to D1 in Figure 3.2 (a). Wages would rise to W1 . Workers would increase the hours they were prepared to supply or economically inactive persons would enter the labour market to expand labour supply until employment reached L1

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  The Economics of Imperfect Labor Markets

  Second Edition

  • Tito Boeri, Jan Ours(Authors)
  • 2013(Publication Date)
  • Princeton University Press

    (Publisher)

  1.2.3 A Perfect Labor Market Equilibrium Figure 1.5 depicts a downward-sloping labor demand together with an upward-sloping aggregate labor supply. In a perfect labor market the Equilibrium Wage level w ∗ will lie at the intersection of the two curves. It is important to notice that there is only one wage level being determined at the equilibrium in this context. Thus, workers with a reservation wage strictly lower than w ∗ will realize a positive surplus from participating in the labor market. The sum of all these individual surpluses is given by the shaded area ( W s ) below the equilibrium and above the labor supply curve. Firms will also realize some surplus or profits. This is depicted as the shaded area ( F s ) above the Equilibrium Wage and below the labor demand schedule. Workers with a reservation wage larger than w ∗ will instead decide not to work. In other words, L ∗ = G(w ∗ ) will be the employment rate (the fraction of the working-age population holding a job), while 1 − G(w ∗ ) will be the equilibrium nonemployment rate. Notice that the Equilibrium Wage level may well be in a flat segment of the labor supply curve. In this case there will be individuals with w r = w ∗ who are not working, even if they are willing to work at the Equilibrium Wage. These individuals are, strictly speaking, unemployed , as denoted by the segment U in the right-hand panel of figure 1.5, although they do not suffer any welfare loss from not working ( w r = w ∗ means that they are just indifferent between working and not working). All other nonemployed individuals are inactive, according to the internationally accepted definitions of labor market status reviewed in section 1.1. w w L s ( w ) F s W s L d ( w ) L L B C A U w w L s ( w ) L d ( w ) L L A (a) Firms’ and workers’ surplus (b) A flat segment of labor supply FIGURE 1.5 Equilibrium in a competitive labor market 14 1. Overview

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  Intermediate Microeconomics

  Neoclassical and Factually-oriented Models

  • Lester O. Bumas(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER THIRTEEN

  Employment, Unemployment, and the Real Wage

  Employment and the related wage payments give workers earnings which amount to about 70 percent of national income and, at the same time, 70 percent of the nation’s purchasing power. By this measure, the earnings of labor are the most important of factor payments and labor the most important of factors.

    The neoclassical paradigm treats all markets the same with supply and demand yielding a stable equilibrium, stable in the sense that the force of disequilibria causes equilibria to be regained. Were labor markets in accord with the theory, the smallest outbreak of unemployment or labor shortage would force the market toward equilibrium and eradication of the labor shortage or surplus. With its high stress on this theory, unemployment in the neoclassical paradigm, is of little, if any, concern. Some distinguished leaders of the school even deny the existence of involuntary unemployment contending that people normally categorized as unemployed have actually chosen leisure over work. This is congenial to the equilibrium thrust of the paradigm—but not to me and others. Unemployment and other labor market disequilibria receives due coverage here.

    The existence of unemployment has given rise to a substantial number of models explaining its existence. Old an new ones are examined. Almost all economists believe that were the real wage less sticky, unemployment would be attenuated. But an empirically based model is presented which indicates that decreases in the real wage would probably worsen unemployment due to the real earnings loss it would create. Disequilibrium in the labor market covers more than unemployment. There is disequilibrium, for example, when workers want to work more or fewer hours than they actually work. All disequilibria considered, about 40 percent of workers are in disequilibrium.

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  The Economics of Imperfect Labor Markets, Third Edition

  • Tito Boeri, Jan van Ours(Authors)
  • 2021(Publication Date)
  • Princeton University Press

    (Publisher)

  fraction of the working-age population holding a job), while 1 − G ( w ∗ ) will be the equilibrium nonemployment rate (defined in section 1.5). Notice that the Equilibrium Wage level may well be in a flat segment of the labor supply curve. In this case there will be individuals with w r = w ∗ who are not working, even if they are willing to work at the Equilibrium Wage. These individuals are, strictly speaking, unemployed , as denoted by the segment U in the right-hand panel of figure 1.11, although they do not suffer any welfare loss from not working ( w r = w ∗ as they are just indifferent between working and not working). All other nonemployed individuals are inactive, according to the internationally accepted definitions of labor market status reviewed in section 1.5. In a perfect labor market there is no total surplus associated with the marginal job. Neither the worker nor the employer enjoys any rent with respect to their outside options. In other words, it is a market where y = w and w = w r , so that also y = w r ; that is, wages are ultimately immaterial at the equilibrium: They simply align the value of the job to the employer to the reservation wage of the worker. Put another way, employers and workers are indifferent between continuing or terminating any job rela-tionship. Losing a worker for an employer or losing a job for an employee is not a big deal. Another worker or job can be found instantaneously without suffering any loss in profits or reduction in well-being. The mar-ket is transparent, workers and firms are perfectly informed about wages and labor services offered by other workers-firms, and there are no fric-tions or costs (e.g., no time related to job search and no transportation costs when going to job interviews) involved in the matching of workers and vacancies—that is, of labor supply and demand.

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  Rediscovering Social Economics

  Beyond the Neoclassical Paradigm

  • Roger D. Johnson(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  If we were to use this as a macro level tool to describe an aggregate labor market, the implications would remain much the same. Around the area identified by W 1 , we have the traditional Neoclassical labor market which tends to move toward a convergence of wages at a given wage rate: Institutional economists refer to this as the ‘primary market’. These workers are assumed to have sufficient human capital, knowledge and non-wage income so that they can move between different job markets and exit the market if the wage rate is too low. The homogeneity of labor assumption is appropriate to the extent that workers have sufficient train- ing/human capital that they can adapt their skills. Attracting additional workers into the market or away from their exiting employment requires increasing the pay rate. Whether wages converge to a precise equilibrium or are randomly distributed around some point is an important question. Life is even more complex at the bottom end. $ Wage S L W1 W0 W2 VMP Fig. 10.2 Labor market(s) and the inverted ‘S’ labor supply LABOR MARKET EQUILIBRIUM? 135 At the lower end of the backward/inverted ‘S’, we have a negatively sloped supply curve of labor, illustrating the scenario where workers need to find employment because they currently lack employment and/or non-wage sources of income. As a result, their reservation wage approaches ‘0’. Firms that can push wages below W 0 find themselves with a persistent surplus of labor. 2 If we simply accept the need-to-work logic, the central problem is what Keynes and Post-Keynesian scholars have described as a lack of effective demand. The concept of effective demand also has, according to some scholars, direct connections with the relative distribution of income and wealth.

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  New Analyses in Worker Well-Being

  • Konstantinos Tatsiramos, Solomon W. Polachek(Authors)
  • 2013(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  Second, the symmetric Nash equilibrium exists but is unstable under the traditional cobweb adjustment. In other words, when the game is played by means of alternate wage offers there is no way to achieve the Nash equilibrium. Instead, I show that such an allocation can be locally stable under the assumption that each firm con-tinuously adjusts its optimal wage offer in the direction of increasing profits by conjecturing that any wage offer above (below) equilibrium will lead the competitor to underbid (overbid) such an offer. Moreover, the analysis of possible labor market equilibria reveals that effort is counter-cyclical, i.e., consistently with efficiency-wage models in which unemployment acts as a worker discipline device (e.g., Guerrazzi, 2008 ; Uhlig & Xu, 1996 ), equili-bria with higher (lower) unemployment are characterized by higher (lower) effort levels. This chapter is arranged as follows. The second section describes the model. The third section derives the symmetric Nash equilibrium. The fourth section investigates its local dynamics. The fifth section discusses possible labor market outcomes and the cyclicality of effort. Finally, the sixth section concludes. THE MODEL The model economy is populated by two identical firms indexed by i = 1 ; 2 and a mass L S of identical workers that inelastically supply their labor services. As in Solow (1979) , each firm seeks to maximize its profit ( π i ) by taking into account that it can simultaneously set employment ( L i ) and the real wage ( w i ). Furthermore, as in Akerlof (1984) and Hahn (1987) , 195 Involuntary Unemployment and Efficiency-Wage Competition the efficiency of employed labor force ( e i ) is assumed to positively depend on the wage offer carried out by the firm that actually provides the job but negatively correlated to the wage offer put forward by the other firm.

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  New Keynesian Economics / Post Keynesian Alternatives

  • Roy Rotheim(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Figure 7.8 ).

  Figure 7.8

  This result deserves a brief comment. The maximum level of labour demand is the amount of labour force that firms want to hire when—being the observed level of employment zero—the ratio between the work effort and the wage rate is at its maximum. In other words, it is the level of labour demand expressed by firms when workers do not shirk at all and the wage rate is fully downward flexible. The analysis carried out here has therefore shown that if an ‘efficiency wage unemployment equilibrium’ exists, it will be stable only if firms would not hire the existing amount of labour force even when workers did not exhibit any propensity to shirk and the wage rate were perfectly flexible. The interesting result is that a hypothetical ‘efficiency wage unemployment equilibrium’ is stable only if unemployment is to be explained by referring to causes different from those highlighted by the efficiency wage theory. The Appendix (see A.4) shows that such a result, here obtained by assuming that

  Σ

  L i

  is a linear function of La

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  Minimum Wages and Employment

  Static and Dynamic Non-Market-Clearing Equilibrium Models

  • C. Ragacs(Author)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  We equate demand and supply of goods and substitute for the wage, calculated from the equilibrium in the capital market, in order to calculate the equilibrium output quantity, 11 C*>", C*" = f 1 \ l ~ a 1 1-a * \-a + p ($K) a . (4.13) Substitute the above expression back into the equilibrium of the capi- tal market to obtain the Equilibrium Wage, 12 w*>", w \n _ l-a + p a ZK. (4.14) As can be directly seen, substitution of the Equilibrium Wage from equation (4.14) into the supply function of goods leads to the equilib- rium price, p*> n 9 * n -1 p •• - a (\-a + p\ x -« 1-a (£/0 (4.15) Finally, substituting the Equilibrium Wage from equation (4.14) and C* n from equation (4.13) into the demand function for working hours permits the expression of equilibrium working hours, 13 //*>", 1 - a + jU Let us recall that equilibrium capital is directly determined by equa- tion (4.5") and that the rental price of capital is used as the numeraire. Hence, the equilibrium in the Walrasian system is clearly defined. 60 Supporting the Partial Equilibrium Results 4.3 THE EFFECTS OF MINIMUM WAGES ("THE EFFECTIVE CASE") It is first necessary to provide some introductory notes on notation. The minimum wage in the effective case will create unemployment. We denote equilibrium employment in the effective case by L* , e

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  John Stuart Mill on Economic Theory and Method

  Collected Essays III

  • Samuel Hollander(Author)
  • 2000(Publication Date)
  • Routledge

    (Publisher)

  Although the essential result of the debate was the conclusion that workers’ unions have a significant role to play, since the competitive solution is inoperative and the wage rate becomes the outcome of a ‘contest of endurance’ between opposing groups (1869:515), Mill was not sufficiently careful in his review and failed to draw the full implications of the new view. Logically, the appearance of an excess labour supply could not be corrected by wage-rate reductions, since there is no wage rate at which demand and supply become equalised. Accordingly, wages should fall to zero, or at least to that level below which the entire labour supply is withdrawn from the market, unless workers’ unions, or—as Thornton suggested—benevolent employers’ combinations, imposed a higher rate. Yet in summarising the new position, Mill wrote as if the competitive equilibrium was somehow still meaningful:

  In short, there is abstractly available for the payment of wages, before an absolute limit is reached, not only the employer’s capital, but the whole of what can possibly be retrenched from his personal expenditure; and the law of wages, on the side of demand, amounts only to the obvious proposition, that the employers cannot pay away in wages what they have not got. On the side of supply, the law as laid down by economists remains intact. The more numerous the competitors for employment, the lower, caeteris paribus , will wages be.

  (Mill 1869:517)

  Mill’s attention was on the case of coincidental schedules and the problem of indeterminacy in this special instance. He failed to pay adequate attention to cases of excess demand or supply.

  Mill in the recantation directed his critique specifically against the notion of a unitary elastic demand curve for labour. It should be noted, however, that in principle, the logic of his case could be applied effectively against the Torrens-Cairnes-Mill version of the wages-fund theory. In this version, the role of fixed technical coefficients is to determine the amount of fixed capital required to assure full employment. What remains of the aggregate capital stock is devoted to wage payments as a result of the operation of the competitive process. But at this point a vital implicit assumption must be emphasised. In order to be assured of the competitive solution a labour demand curve of negative slope is required. To obtain such a demand curve when constant proportions between labour and fixed capital is the rule, it is necessary to allow for hypothetical variations in the quantity of fixed capital. For if an excess demand for labour should appear—as in the case immediately after an increase in investment—fixed coefficients between inputs presume that employers are prepared and able to allocate to the support of the additional labour required the necessary capital equipment. In point of fact, the wage rate is forced upwards towards a new equilibrium position by the scarcity of labour services, so that additional fixed capital is not actually constructed. The logic of the process, however, implies that firms are able to make additions to their fixed capital stocks. Thus the analysis is applicable only to the Marshallian long run. Once the fixed capital

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