Commentary
In an era of inflation, strikes are everywhere, and workers are suffering. Had their wages kept pace with inflation, they would not be grumbling about wanting to be treated better. Academics say wage-price exhibits a spiral, meaning that they reinforce each other. So, why is it that wage growth always seems to be slower than that of prices (inflation)?
Explaining this involves two concepts. One is profit maximization under the market mechanism, so the selling price is set according to market demand. The other is the costs of production, of which labor is just a part.
Profit maximization says firms are maximizing revenue minus costs, the former is the price times output (quantity) whereas the latter includes a few components, with one of them being labor cost or wage times labor employed. At the margin (that is, under the first-order condition by doing a bit of basic calculus), the marginal product of labor (MPL) equals the real wage or wage per price level. Using the other concept, the production function prescribes output made by factors including labor. At the margin again, MPL equals labor share times output per labor….