This week's Australian National Accounts data saw the wage share fall further to 49 per cent, a record low. If workers cannot maintain nominal wages growth equal to the growth in labour productivity, then their real wages fall.
Answer: False
The answer is False.
The question requires you to understand what determines the real wage and what the relationship between nominal wages growth and labour productivity growth is.
The real wage is defined as the purchasing power equivalent on the nominal wage that workers get paid each period. To compute the real wage we need to consider two variables: (a) the nominal wage (W) and the aggregate price level (P).
The nominal wage (W) - that is paid by employers to workers is determined in the labour market - by the contract of employment between the worker and the employer. The price level (P) is determined in the goods market - by the interaction of total supply of output and aggregate demand for that output although there are complex models of firm price setting that use cost-plus mark-up formulas with demand just determining volume sold. We shouldn't get into those debates here.
The inflation rate is just the continuous growth in the price level (P). A once-off adjustment in the price level is not considered by economists to constitute inflation.
The real wage (w) tells us what volume of real goods and services the nominal wage (W) will be able to command and is obviously influenced by the level of W and the price level. For a given W, the lower is P the greater the purchasing power of the nominal wage and so the higher is the real wage (w).
We write the real wage (w) as W/P. So if W = 10 and P = 1, then the real wage (w) = 10 meaning that the current wage will buy 10 units of real output. If P rose to 2 then w = 5, meaning the real wage was now cut by one-half.
The relationship between the real wage and labour productivity relates to movements in the unit costs, real unit labour costs and the wage and profit shares in national income.
The real wage will rise if nominal wages rises faster (or fall more slowly) than the price level irrespective of what is happening to labour productivity.
Labour productivity (LP) is the units of real GDP per person employed per period:
LP = GDP/L
so it tells us what real output (GDP) each labour unit (L) that is added to production produces on average. Employment here could be specified in terms of persons or person-hours, depending on the focus of the enquiry.
Unit labour costs is equal to total nominal wage costs (W times L) divided by total output:
ULC = (W x L)/GDP
You will note that this can also be written as W.(L/GDP) and L/GDP is the inverse of labour productivity. So unit labour costs rise if nominal wages growth outstrip labour productivity.
Labour productivity growth thus provides the "space" for real wages to grow without putting pressure on the price level (in a mark-up pricing world).
Now it becomes obvious that if the nominal wage (W) and the price level (P) are growing at the same pace, then the real wage is constant.
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