Impact of Higher Productivity on the Price-Setting Curve
An increase in labor productivity shifts the entire price-setting (PS) curve upward. This shift occurs because the firm's profit-maximizing markup, which is determined by the level of market competition, is not affected by changes in productivity. As a result, the respective shares of output going to profits and wages remain constant. When output per worker increases, this fixed distribution ensures that the real wage also rises, leading to a higher PS curve and a new equilibrium with an improved real wage for workers.
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Impact of Higher Productivity on the Price-Setting Curve
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