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- A wage is the amount paid to workers for a certain time period’s worth of work.
- Though a wage is often thought of as what a person is paid an hour, economists also use it to describe how much any individual worker brings home from work, even if they are paid by salary.
- The wage is determined in a market, much like the market for apples. In this case however, the market is the labor market.
- The wage clears the market and is determined by the supply and demand for labor.
- Anyone who works is a part of the supply of labor.
- Assume you are deciding how much to work and how much to sit around and watch TV. If the wage available to you is high, you will work more hours because making more money now means more TV time in the future. So as wages get higher the supply of labor increases.
- Businesses that need labor to make their product demand labor.
- If the wage is high, businesses have to pay their workers more and will hire less and make do. As the wage falls they will hire more workers.
- The wage adjusts until supply and demand meet
- The wage will fluctuate according to shifts in the supply and demand of labor
- There are situations where the wage cannot adjust to insure that labor supply and labor demand are equal. These result in structural unemployment.
- If the government forces wages to be higher than the market says they should be (i.e. it sets a binding minimum wage law), there will be more people willing to work (because the wage is high), but less businesses willing to hire (because the wage is too high). As a result there are people looking for work who are unable to find work.
- The same thing can happen if a labor unions negotiates a wage higher than the market dictates.
- Wage negotiations happen between the labor union and the businesses that employ unionized workers.
- Increasingly in Europe the labor unions negotiate directly with the government in a process of wage bargaining. In as much as the negotiation leads to above market level wages (as it often does) there will be structural unemployment.