Wage Determination And The Basic Economic Questions

Determining wages by the laws of supply and demand also shows how our market economy answers the questions of What, How and Who. For example, if consumers decide that concrete buildings are better than those made of steel, then the demand for concrete workers will increase and their wages will rise. Higher wages will bring workers to the concrete construction industry. So higher wages help answer the question of What goods and services will be produced.

As wages increase, builders look for labor-saving ways to fulfill their contracts. In this way the mar­ket determines How goods and services will be pro­duced.

Finally, the increased wages and profits earned by people in the concrete construction industry will allow them to enjoy higher living standards. The decreased earnings of those in steel construction will mean lower living standards. Again, the inter­action of supply and demand answers the question of Who is to receive the goods and services pro­duced by the economy.

This market mechanism also pushes the economy to use its resources most efficiently. Assume for the moment that the country of Pacifica produces two types of products consumer goods symbolized by butter, and military hardware symbolized by guns. All other things being equal, the quantity of "guns" and "butter" Pacifica produces depends on the con­sumer demand for these products.

The limits of the nation 's production possibilities are indicated in the graph. At the present time market conditions support the production of 3,000 guns and 10,000 tons of butter (point A). Suppose, however, that demand for Pacifica's weapons changes, and customers are ready, willing, and able to pay more for them.

To produce enough guns to satisfy demand, say 5,000, workers will have to shift from butter pro­duction into the gun production. How will this take place?

As weapon purchases increase, their prices will increase. This will lead gun manufacturers to lure workers from butter production by offering higher wages. Naturally, the movement of workers into the gun factories will reduce butter production and wages in butter factories.

Finally, when the output of 5,000 guns has been reached (point B), the shift of workers from butter production will cease. At this point, workers think­ing of moving into gun production will find that they would be better off staying put. Why? Because once the demand for 5,000 guns has been satisfied, additional workers would only push wages in that industry down. Meanwhile, butter producers will pay wages to attract workers to produce the 6,000 tons of butter they can sell at current demand. In this way competitive markets push the economy to produce at the limits of its capabilities.

Interestingly, the United States is facing a similar, but opposite problem. With the changes in the for­mer Soviet Union, the demand for military hard­ware has declined. Thousands of workers in the defense industry are looking for new ways to use their skills. Based on this reading, what is happen­ing to wages and employment opportunities in the U.S. defense industry?

Date: 2015-02-28; view: 791