Question

Total labor income equals the real wage times the amount of labor hired: (W/P)L=WL/P. Labor's share of income is thus WL/P divided by output Y: (WL/P)/Y=WL/PY. Suppose that labor's share of total income is approximately constant over time. Figure 3-5 in the text shows this has been true of the US. If labor's share of income is approximately constant, the real wage

a) closely tracks labor productivity:
b) is unrelated to labor productivity.
c) is inversely related to labor productivity.
d) systematically diverges from labor productivity.

Answer 1

The real wage closely tracks labor productivity, as firms base wages on the value of worker's output over time.

Step-by-step explanation:

If labor's share of income is approximately constant, the real wage a) closely tracks labor productivity. This relationship is due to the way firms adjust their wages based on the value of the output generated by their workers. The assertion can be supported by long-term economic behavior where firms that pay less than what their workers produce risk losing those workers to competitors, while firms that overpay may incur losses. Additionally, historical economic periods show that as productivity rises, demand for labor shifts and wages eventually adjust to match this productivity change, although with some lag due to wage contract timings and the difficulty of measuring individual productivity.