Wage Employment

Wage rigidity refers to the situation where wages do not adjust downward. This could occur when wages are determined through union contracts that set wages for the duration of the agreement. Such set wages provide stability and predictability for workers, ensuring they receive a stable income for the duration of the agreement. However, this can become problematic during an economic downturn when firms experience a decline in demand for their products.In times of reduced business activity,...

The full-employment, or FE, line shows the level of output an economy can maintain when workers and resources are fully and efficiently used. This output level is called full-employment output, or Y-bar. It represents the economy’s normal productive capacity in the long run.The FE line is based on conditions in the labor market. Full employment is reached when firms can hire the workers they need and most people willing to work are able to find jobs at the current real wage. Some unemployment...

Wage rigidity refers to the observation that wages cannot be easily adjusted downwards. This means that labor market cannot clear at the equilibrium wage.Minimum wages are government-imposed wage floors—legal requirements that employers must pay eligible workers at least a certain hourly rate. Minimum wage laws protect low-income workers from exploitation and help to ensure a minimum standard of living.However, when the minimum wage is set above the market equilibrium, it can create...

Efficiency wages are wages set above the market-clearing level. The market-clearing wage is the rate at which the quantity of labor supplied equals the quantity of labor demanded.One of the reasons firms may offer efficiency wages is to encourage better performance from workers. In situations where employers cannot directly observe how much effort each employee puts in, paying the market-clearing wage may not be enough to ensure that workers maintain productivity. To address this issue, firms...

The full-employment, or FE, line shows the amount of output an economy can produce when workers and resources are being used efficiently. It represents the economy’s long-run production capacity. When productivity, labor supply, or physical capital changes, the FE line also changes because the economy’s ability to produce goods and services is affected.Higher productivity moves the FE line to the right. Workers can produce more output in the same amount of time. For example, improved store...