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Relationship Between Market Competition, Profit Share (σ), and Wage Share
The firm's profit share (σ) is inversely related to the level of competition in the product and labor markets. When both markets are highly competitive, the firm's ability to set prices above cost is limited, resulting in a low profit share (σ) and a correspondingly high wage share, , which will be close to 1. Conversely, a lack of competition in either market allows the firm to secure a larger profit share, which in turn leads to lower real wages for workers.
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Introduction to Macroeconomics Course
Ch.1 The supply side of the macroeconomy: Unemployment and real wages - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Effect of Market Competition on Profit and Wage Shares
An economy experiences two simultaneous shifts: first, a reduction in barriers to entry for new businesses, leading to more firms competing for customers; second, a strengthening of collective bargaining rights, increasing the power of workers in wage negotiations. According to the price-setting model, what is the most likely impact of these combined changes on the typical firm's profit share per worker (σ)?
Product Market Competition and Profit Share
Market Dynamics and Profit Share in the Tech Sector
Match each change in market conditions to its most direct impact on the components that determine a firm's profit share per worker (σ).
A government enacts new legislation that significantly weakens the collective bargaining power of labor unions. According to the price-setting model, this change will, all else being equal, cause the typical firm's profit share per worker (σ) to decrease.
Relationship Between Market Competition, Profit Share (σ), and Wage Share
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Impact of Market Competition on Income Distribution
Consider an economy where a series of policy changes leads to a substantial reduction in the level of competition in both the product market (e.g., weaker antitrust laws) and the labor market (e.g., restrictions on unionization). Based on the relationship between market structure and income distribution, what is the most probable outcome?
A government policy that successfully breaks up monopolies and increases the number of competing firms in an industry would be expected to decrease the share of income paid to labor.
Explaining the Link Between Market Power and Income Shares