Constancy of the Price-Setting Real Wage with Respect to Employment

Suppose that every firm in an economy simultaneously grants a 10% increase in the nominal wage to all its employees. If each firm continues to set its product price as a fixed proportional markup over the wage it pays, what will be the resulting effect on the economy-wide real wage (the ratio of the nominal wage to the overall price level)?

Consider an economy where all firms determine their product price by adding a fixed percentage markup to their nominal wage costs. If a major economic downturn leads to a significant decrease in the total number of people employed across the economy, what is the predicted effect on the aggregate real wage (W/P) that results from this collective price-setting behavior?

Determinants of the Price-Setting Real Wage

Consider two economies, A and B, that are identical in terms of their aggregate nominal wage and labor productivity. The only difference is that product markets in Economy A are highly competitive, while the markets in Economy B are dominated by a few firms with significant pricing power. In a framework where all firms set their product price as a percentage markup over their labor costs, how would the resulting aggregate real wage (the ratio of the nominal wage to the price level) in Economy A compare to that in Economy B?

Analyzing Shocks to the Price-Setting Real Wage