Discuss the rationale behind the WS and
Discuss the rationale behind the WS and PS curves (12 marks)
Keynesian macroeconomics assumes that markets are imperfect and this as the result of lack of competition. The implication of imperfect market is that agents are no longer price takers as in perfect markets, but become price setters. In product markets the firms are price setters considering the elasticity of demand which is partly dependant on competition. In the labour market, workers are the wage setters. Through collective bargaining Trade Unions set wage rates, considering the elasticity for demand for labour and the level of local unemployment. “A worker who is employed in an area of high unemployment earns less than an identical individual who works in a region with low joblessness”. ( www.njfac.org/us19.htm last accessed on the 19th March 2014). When price taking behaviour is accepted, it changes how macroeconomics is analysed as inflation, unemployment, monitory policy, fiscal policy etc.
The wage equation (WS) sets a relationship between the wage (WP) and the level of unemployment (E) in the economy, and is considered from the worker’s point of view. WS shows the rates of real wages that would fulfil the level of expectations of workers at different levels of unemployment. The Price Setting equation (PS) also sets up a relationship between the wage (WP) and the level of unemployment (E) but is viewed from the prospective of the firm. PS shows the rate of real wages that would fulfil the expectations of the firm at different levels of unemployment. When the two curves meet, the real wage at the point of intersection will meet the expectation of both the firm and the worker; thus equilibrium is established by the intersection of the PS and WS.
When Trade Unions / workers bargain with employers regarding the money wage (W) consideration must be given to the state of employment and the expected selling price level of the product in the future. With employment, the higher the level of
Keynesian macroeconomics assumes that markets are imperfect and this as the result of lack of competition. The implication of imperfect market is that agents are no longer price takers as in perfect markets, but become price setters. In product markets the firms are price setters considering the elasticity of demand which is partly dependant on competition. In the labour market, workers are the wage setters. Through collective bargaining Trade Unions set wage rates, considering the elasticity for demand for labour and the level of local unemployment. “A worker who is employed in an area of high unemployment earns less than an identical individual who works in a region with low joblessness”. ( www.njfac.org/us19.htm last accessed on the 19th March 2014). When price taking behaviour is accepted, it changes how macroeconomics is analysed as inflation, unemployment, monitory policy, fiscal policy etc.
The wage equation (WS) sets a relationship between the wage (WP) and the level of unemployment (E) in the economy, and is considered from the worker’s point of view. WS shows the rates of real wages that would fulfil the level of expectations of workers at different levels of unemployment. The Price Setting equation (PS) also sets up a relationship between the wage (WP) and the level of unemployment (E) but is viewed from the prospective of the firm. PS shows the rate of real wages that would fulfil the expectations of the firm at different levels of unemployment. When the two curves meet, the real wage at the point of intersection will meet the expectation of both the firm and the worker; thus equilibrium is established by the intersection of the PS and WS.
When Trade Unions / workers bargain with employers regarding the money wage (W) consideration must be given to the state of employment and the expected selling price level of the product in the future. With employment, the higher the level of