Answer to Question #50104 in Finance for abdulla sabit

Question

what is meant by wage-price flexibility?How did pigou show that given a free enterprice competitive economic system flexibility of wages and prices always ensures full employment ?

Answer 1

Wages are said to be flexible when they respond to changes in supply anddemand and lead to the market clearing wage being set. It implies that the wage
will be set by the MRP of labour and marginal cost of labour. Any change in
supply and demand for labour will lead to a change in the wage rate.
With perfectly flexible wages, the wage rate would always be set where MRPof labour = Marginal Cost (MC) at Q1.
Therefore, if a workers, marginal product increased, this would translateinto a higher wage rate. This could be achieved through paying workers
piecemeal for the amount they produce, e.g. £3 per cartoon of broccoli that you
pick.
If there was an increase in supply of workersin the industry, this would push down wages in the industry, leading to an
immediate decline in the wage of each worker. Usually this wouldn’t happen,
because workers would resist nominal wage cuts, and firms may even be reluctant
to cut wages because of impact on morale / costs of changing wages.