[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

18
210
AVERAGE HOURLY EARNINGS ($)
16
14
12
10
8
6
Nominal wage
(left-hand scale)
Real wage
(1982 dollars,
left-hand scale)
Price level
(right-hand scale)
190
170
150
130
110
90
70
PRICE LEVEL (CPI, 1982–1984 = 100)
4
50
2
1965 1970 1975 1980 1985 1990 1995 2000
30
Figure 24.1
NOMINAL WAGES, THE PRICE
LEVEL, AND REAL WAGES
The solid blue line shows that average nominal wages in the United States have risen
significantly since 1965. The red line shows that the price level also has risen over this
period. With average nominal wages and the price level rising at roughly the same rate,
average real wages (shown by the green line) in 2003 were only slightly higher than they
had been in 1965.
SOURCE: Economic Report of the President (2004), Table B-47.
Wrap-Up
REAL WAGES
The real wage is the nominal or dollar wage adjusted for prices.
Workers care about the real wage that they receive because it measures the
purchasing power of their wages.
Firms care about the real wage because it measures the cost of labor.
Figure 24.2 shows the aggregate labor market, with the real wage (w/P) on the
vertical axis, the quantity of labor (L) on the horizontal axis, and the aggregate
demand and supply curves for labor. With a given set of equipment and technology,
the aggregate demand for labor depends on the wages firms must pay, the prices
firms receive for the goods and services they produce, and the prices they have to
pay for nonlabor inputs such as raw materials and equipment. With the prices of
goods and inputs held constant, the aggregate labor demand curve traces out the
quantity of labor demanded by firms at different wages. At lower wages, the quantity
of labor demand is greater. There are two reasons for this. First, as wages fall,
labor becomes relatively less expensive compared with the price of the goods that
firms produce. Because profits are greater, firms have an incentive to expand pro-
528 ∂ CHAPTER 24 THE FULL-EMPLOYMENT MODEL