CHAPTER 20
WAGES AND PRICES

THE real-wage rate obtaining in any short-period situation emerges from the total operation of the economy and is not controlled by any conscious decisions, but the money-wage rate is the subject of particular bargains between entrepreneurs and workers and is fixed consciously. In our simple model with all labour alike we assume a rapid diffusion of a change in money-wages taking place at any one point through the system as a whole, so that in effect a single scale of wages (for normal hours and overtime) is in force at any moment. The effect of a change in the money-wage rate upon prices, real wages, profits and employment depends upon the situation in which it is made and upon the state of competition and the price policy of entrepreneurs.


AT CAPACITY

Rising Money Wages with Competition. We first consider the situation when output is running just about at capacity, subjective-normal prices prevail, and the situation is expected to reproduce itself, in the manner of a golden age. There is only a small reserve of unemployed labour. Trade unions are exerting a constant pressure to raise money wages, and from time to time they succeed, so that over the long run an upward drift in the money-wage rate is going on.

A rise in the money-wage rate raises both prime cost and the reproduction cost of capital goods. It therefore raises subjective-normal prices. In competitive conditions the natural reaction for each entrepreneur is to raise the prices of his products correspondingly, for each knows that others are suffering the same rise in costs, and since all were working near capacity none is much afraid of his competitors expanding

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