In an economy composed of identical firms that all pay the same wage, `w`, the expected net utility (`v`) an unemployed worker anticipates from finding any job simplifies to the wage minus the cost of effort (`c`). This relationship is expressed by the formula `v = w – c`.

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To aggregate the single-firm wage-setting model to an economy-wide level, several simplifying assumptions are made. The model presumes a fixed number of firms, all of which are identical in terms of productivity and labor market challenges. Consequently, the cost of effort and the employment rent are uniform across all firms. This leads to a scenario where every firm faces the same no-shirking wage curve and therefore chooses the same wage (w) and employment level (N).

Assumptions for the Economy-Wide Wage-Setting Model

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

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