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In the Wage-Setting/Price-Setting (WS-PS) model, the supply-side equilibrium occurs at the intersection of the wage-setting and price-setting curves. At this point, the real wage is at a level that simultaneously meets two conditions: it is high enough to motivate employees to work effectively, and it aligns with the firm's profit-maximizing price markup over production costs. This equilibrium determines the economy's level of employment and the distribution of output between wages and profits.

Supply-Side Equilibrium in the WS-PS Model

Figure 2.7 illustrates an economy's supply-side equilibrium using a two-panel diagram. The left panel shows the Wage-Setting (WS) and Price-Setting (PS) curves intersecting at point A, where the firm's profit share (σ) is 40%. This equilibrium results in workers receiving 60% of output and 10 people being unemployed. The right panel displays the corresponding Lorenz curve for this income distribution, which includes workers and owners. This curve visualizes the inequality in the economy, quantified by a Gini coefficient of 0.36.

Figure 2.7: WS-PS Equilibrium and Corresponding Lorenz Curve

In a model where the supply-side equilibrium is found at the intersection of the wage-setting and price-setting curves, what is the most likely outcome if a new policy significantly increases competition in the product market, forcing firms to reduce their profit markups?

In a model where the economy's supply-side equilibrium is determined by the intersection of an upward-sloping wage-setting curve and a horizontal price-setting curve, explain why a situation where the wage-setting curve is above the price-setting curve at the current level of employment is not a stable equilibrium. What economic pressures would this situation create?

Labor Market Disequilibrium Analysis

Analyze the combined effect of the two simultaneous changes described in the case study on the economy's equilibrium level of employment and the equilibrium real wage. Explain the mechanisms that lead to the new equilibrium.

Labor Market Equilibrium Analysis

Explain why the intersection of the wage-setting and price-setting curves represents a supply-side equilibrium. In your answer, describe the conditions that are met at this point for both firms and workers, and analyze the economic pressures that would arise if the real wage were above the price-setting curve.

The Nature of Supply-Side Equilibrium

In an economy where the real wage and employment level are determined by the intersection of the wage-setting and price-setting relationships, the resulting equilibrium implies that there is no involuntary unemployment.

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