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In labour economics, Shapiro–Stiglitz theory of efficiency wages (or Shapiro–Stiglitz efficiency wage model) [1] is an economic theory of wages and unemployment in labour market equilibrium. It provides a technical description of why wages are unlikely to fall and how involuntary unemployment appears.
The formal statement of the equilibrium condition of the Harris–Todaro model is as follows: [2] Let be the wage rate (marginal productivity of labor) in the rural agricultural sector. Let be the total number of jobs available in the formal urban sector.
Factor price equalization is an economic theory, by Paul A. Samuelson (1948), which states that the prices of identical factors of production, such as the wage rate or the rent of capital, will be equalized across countries as a result of international trade in commodities. The theorem assumes that there are two goods and two factors of ...
Because workers are paid more than the equilibrium wage, there may be unemployment, as the above-market wage rates attract more workers. [citation needed] Efficiency wages offer, therefore, a market failure explanation of unemployment in contrast to theories that emphasize government intervention such as minimum wages. [2]
In dynamic equilibrium, output and the physical capital stock also grow at that same rate, with output per worker and the capital stock per worker unchanging. Similarly, in models of inflation a dynamic equilibrium would involve the price level , the nominal money supply , nominal wage rates , and all other nominal values growing at a single ...
In the short run (and possibly in the long run), markets may find a temporary equilibrium at a price and quantity that does not correspond with the long-term market-clearing balance. For example, in the theory of " efficiency wages ", a labor market can be in equilibrium above the market-clearing wage since each employer has the incentive to ...
The marginal revenue productivity theory of wages is a model of wage levels in which they set to match to the marginal revenue product of labor, (the value of the marginal product of labor), which is the increment to revenues caused by the increment to output produced by the last laborer employed.
In Book V of Keynes's theory, Chapter 19 discusses whether wage rates contribute to unemployment and introduces the Keynes effect. Chapter 20 covers mathematical groundwork for Chapter 21, which examines how changes in income from increased money supply affect wages, prices, employment, and profits.