Blog-Reference and Blog-Reference
Labor market theory has two aspects: macro and micro. The macroeconomic equation for the relationship between average wage rate and employment says that the average wage rate must rise in order to increase overall employment.#1
In the second step, differentiation comes in. Different productivities for different firms that sell on one market with one market-clearing price mean that the profit decreases from the highest productivity firm to the lowest productivity firm. Let us assume for the moment that the profit of the marginal firm is zero.#2
It is obviously not so smart to increase the wage rate in the marginal firm. So, what has to be achieved is to satisfy BOTH the macro condition of a rising average wage rate and the micro condition of not pushing the marginal firm over the cliff.
To look, in good old Econ 101 manner, only at the marginal worker in the marginal firm prevents the solution of the employment problem.
Egmont Kakarot-Handtke
#1 See Wikimedia and Full employment: thinking like the macro-boss
#2 Schumpeter and the Essence of Profit
Related Productivity and the zombie apocalypse
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Blog capture May 30 20:28
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Blog capture May 30 20:36