Schhtumped on this question

kerrymick

Explain how an increase in the real wage could cause everyone in employment to work fewer hours but still increase the total amount of work done in the economy.

I am new to the whole economics world and I have been given the above question to answer as an 'introduction'. I have ground to a halt trying to find an answer or even where the general subject area is? I'm thinking consumerism, but may be wrong. Any help from someone who knows what they are talking about would be great.

silverharp

I am not an economist but it sounds like the answer revolves around increasing productivity though capital investment, china would be an example where factories are not efficient due to cheap labour, as labour costs rise there is an incentive to mechanise.

Munurty

I don't know enough to answer the question, all i can give is my opinion.

I remember learning something about how an increase in wages can cause a decrease in hours worked. In developed countries people earn so much that they prefer to work less hours for the same wages instead of working more hours for increased wages. Therefore an increase in wages could lead to a decrease in hours worked.

A quick goolge then linked in the increase in productivity:

The long-run relationship between real wages and labor productivity is investigated using cointegration and Granger non-causality tests for the US economy over the period 1869–1999. The series are cointegrated, indicating that there is a link between real wages and labor productivity in the long run. Granger non-causality tests support unidirectional causation from real wages to labor productivity. This outcome corroborates the conception that increases in real wages drive profit-seeking capitalists to raise labor productivity as their main weapon in defending their profitability. This result is consistent with a long tradition among economists that perceives technical change as being biased toward labor-saving.

Again i'm no economist thats just the way I see it.

gerry87

It would encourage unemployed people to get jobs - people in employment may work fewer hours, but the people who weren't in employment will work more. People on commission pay would be encouraged to work harder/produce more, incentives of promotions will be sweeter so people will work harder for their promotions.

The question says "could", so after explaining how it could, you could go on to explain how it might not. People on the lower end of the pay scale will generally work more hours while people on the upper end will begin to work less. google "Backward bending supply curve"

Économiste Monétaire

I really don't like using Wikipedia but the graph on this can illustrate what gerry87 said.

http://en.wikipedia.org/wiki/Backward_bending_supply_curve_of_labour

nesf

kerrymick wrote: »

I am new to the whole economics world and I have been given the above question to answer as an 'introduction'. I have ground to a halt trying to find an answer or even where the general subject area is? I'm thinking consumerism, but may be wrong. Any help from someone who knows what they are talking about would be great.

The more explicit version of the question you were given is: "How does people's behaviour change when their incentives change because of an increase in the real wage?"

That's how "an economist"* would approach the question, the answer that follows is pretty much what gerry87 said.


*Not all economists would necessarily approach the question in this way, but this would be the "cookie cutter" Econ 101 approach to things that you can assume until told otherwise essentially.

Time Magazine

Mention the contrasting income and the substitution effects, if you can. Hint: one of them will overpower the other.

nesf

Ibid wrote: »

Mention the contrasting income and the substitution effects, if you can. Hint: one of them will overpower the other.

For the more mathematical among us: http://elsa.berkeley.edu/users/mcfadden/e100a_f01/consumer.pdf

It's consumer theory but it's a nice treatment of it if you likes calculus.*




*Yes, I miss Physics a lot sometimes.

Time Magazine

nesf wrote: »

For the more mathematical among us: http://elsa.berkeley.edu/users/mcfadden/e100a_f01/consumer.pdf

Wouldn't it be lovely to have Daniel McFadden teach you EC101? Though I had no complaints with Frances Ruane. Rawr. Way hotter than Moore McDowell.

Back on topic, is it Okun's Law that predicts that a 1% increase in employment will not lower unemployment by 1% on account of the increased attractiveness of the labour market? It's been a long day.

Économiste Monétaire

Ibid wrote: »

Wouldn't it be lovely to have Daniel McFadden teach you EC101? Though I had no complaints with Frances Ruane. Rawr. Way hotter than Moore McDowell.

Blasphemy

Ekancone

http://en.wikipedia.org/wiki/Efficiency_wage_hypothesis