Given the scenario, analyze the net effect of these two simultaneous changes on the real wage paid to workers. Will the real wage increase, decrease, or is the outcome uncertain? Justify your conclusion.

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The wage share is the fraction of a worker's total output (λ) that is paid as a real wage (w). This share is determined by the firm's profit share (σ), which in turn depends on market competition. The relationship is defined by the formula: $\text{wage share} = \frac{w}{\lambda} = 1 - \sigma$. This equation shows that the wage share is what remains of the output per worker after the firm's profit share is accounted for.

Formula for the Wage Share

Analyzing Changes in Real Wages

In a specific economy, new government policies lead to a significant increase in competition among firms. Assuming the output per worker remains constant, what is the most likely impact on the share of output paid to workers as wages?

In an economy, firms on average retain 30% of the value of output per worker as profit. Based on this information, what percentage of output per worker is paid out as wages?

Calculating the Wage Share

True or False: If a firm successfully increases its profit share from 20% to 25%, while the output per worker remains constant, the real wage paid to workers must also increase.

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