1Cademy - Mechanism: How a Lower Markup Raises the Real Wage and Lowers the Profit Share

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Mechanisms Driving Changes in the Price-Setting Real Wage

Causation

Mechanism: How a Lower Markup Raises the Real Wage and Lowers the Profit Share

A reduction in a firm's profit markup directly causes a decrease in its profit-maximizing price (P). With the nominal wage (W) held constant, this lower price level leads to an increase in the real wage ( $W/P$ ). This process, initiated by a smaller markup, culminates in a lower profit share (σ) for the firm. The causal sequence is: $\downarrow \text{markup} \Rightarrow \downarrow P \Rightarrow \uparrow \frac{W}{P} \Rightarrow \downarrow \sigma$