Question

A. Explain the role labor’s productivity plays in wage determination in the competitive labor market. If productivity increases, what happens to wages and why?
b. What is meant by the term "compensating wage differentials?"
c. Why is the demand for labor called a "derived demand."

Answer 1

Answer:

(A)Wages decrease in the long term

Explanation:

(A) The principles of supply and demand applies here.

Higher worker productivity in a particular industry implies increased demand for workers in the industry (short term effect).

Increased supply of workers implies:

1. output per worker increases, resulting in increase in supply of products in the industry. But, the laws of supply and demand comes in, because when supply increases, prices decrease.

That is, the increase in worker productivity may cause a decrease in prices resulting in a decrease in wages since the firm's revenue declined (long term effect).

2. Increase in the supply of workers in the industry with increased in productivity over workers from other industry because of initial increase in wages. This would lead to a decrease in wages because the supply of workers would exceed demand.

(B) The compensation differential is the additional amount of money that a given worker must be offered in order to motivate him to accept a given undesirable job, relative to other jobs that the worker could perform.

(C) This is called a derived demand because it is often based on the demand for products.

For example, when consumers want more of a particular good or service eg clothing, more firms in the industry will want workers that make this product.