Final answer:
Wage increases can lead businesses to invest in machinery, increasing worker productivity but reducing the number of employees needed. The firm's employment level is determined by the point where the market wage equals the marginal revenue product of labor. Productivity significantly influences long-term average wage levels in an economy.
Step-by-step explanation:
The discussion revolves around the relationship between wages, labor, and productivity within a firm. As wages increase, from the example of rising to $24 an hour, the company has a motivation to invest in more machines, enhancing productivity as workers use improved physical capital equipment.
However, this transition to more capital-intensive production means that fewer workers will be required. The firm will adjust employment levels until the market wage aligns with the marginal revenue product (MRP) of labor. For example, if the market wage is $20, the firm will hire workers until the MRP is also $20, which may indicate hiring four workers.
Ultimately, over time, the compensation that firms are willing to offer their workers is closely tied to the value of the output those workers are responsible for producing. Productivity growth is a key determinant of the average wage level in any economy, impacting how firms respond to wage demands and how they balance the employment of labor and capital accordingly.