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Economic Theory

                  At a higher real wage, firms demand fewer labor hours. A higher real
            wage  means  that  labor  time  is  more  expensive  than  before,  so  each
            individual  firm  demands  less  labor  and  produces  less  output.  The  point
            where the labor supply and demand curves meet is the equilibrium in the

            labor  market.  At  the  equilibrium  real  wage,  the  number  of  hours  that
            workers choose to work exactly matches the number of hours that firms

            choose to hire.
                  The total amount of money received by the laborer in the process of
            production is called nominal wage. Nominal wages do not depend on costs
            in the economy and require no calculation. Remember that the real wage is

            calculated as follows:


                                                                          .                            (4.3)



                  Real wages are the amount of income a person earns relative to some
            past date while correcting for the impact of inflation. Real wages provide
            insight into the actual purchasing power a worker has. Real wages only
            increase if nominal wages increase faster than the inflation rate. If prices

            increase faster than nominal wages, real wages will fall. The real wage is
            defined as the nominal wage divided by the general price level.
                  The  government  causes  wage  rigidity  when  it  prevents  wages  from

            falling to equilibrium levels. Minimum-wage laws set a legal minimum on
            the wages that firms pay their employees, it is named minimum nominal
            wage. Even if the nominal wage is fixed, the real wage decreases when the
            price level increases. It follows that rigidities in the nominal wage translate

            into rigidities in the real wage only if the price level is also sticky.
                  Another story goes by the name of efficiency wages. Wages in excess
            of the equilibrium real wage that are paid by firms to provide incentives

            for their workers to perform their duties. The idea here is that firms have
            an incentive to pay a wage above the equilibrium. Workers who are paid
            higher wages may feel better about their jobs and be more motivated to

            work hard. Firms may also find it easier to recruit good workers when they
            pay well and find it easier to keep the workers that they already have. The
            extra  productivity  and  lower  hiring  and  firing  costs  may  more  than

            compensate the firm for the higher wage that it is paying.





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