Answer to Question #286690 in Macroeconomics for Msb

Question

a) Explain fully how each of the following factors influence the determination of wages in 

the economy

i. Expected price level (Pe)

ii. Unemployment rate (u)

iii. Institutional factors such as labor laws and regulations, minimum wages and 

unemployment benefits (z)

Answer 1

i) Expected price level: when the expected price level rises and the money wage rate remains constant, the real wage rate falls. When the price level falls and the money wage rate remains constant, the real wage rate rises in the economy.

ii) Unemployment rate: if the economy is booming, there is a high demand for labor and a decreasing unemployment rate and thus increase in wage level. Conversely, when unemployment rates remain high, there is low demand for labor relative to excess supply and wage level decreases in the economy.

iii) Institutional factors: institutional factors such as labor laws and regulations, minimum wages and unemployment benefits determine wages in the economy by setting minimum standards over safety and pay, placing legislation on maximum and minimum limits on wages or working hours and overall regulating the pay in the labor market.