The Determination of the Wage Rates

Abstract

To the comfort of the reader we repeat here the assumptions on the status of information concerning the wage rates, the price of other goods and the interest rates which a firm has at the end of period — 1, when it has to decide on the price of its own good, the size and organization of production and on its financial position in the next period 0. We assume that the wage rates are determined by negotiations between employers and the pertinent trade unions in the foregoing period and announced to everybody at the end of period — 1 such that all firms know the wage rates in the next period 0 with certainty. This is not so with the prices of other commodities. They are fixed by each firm independent of each others, announced to the public at the beginning of period 0 and sustained for this whole period. When fixing the own price, the firm does not know the prices determined by all other firms. Of course, these prices of other commodities are necessary for estimating the costs of and the demand for its own product. Since these prices are not known with certainty, expectation values have to be substituted for the unknown actual prices. These expected prices are estimated by extrapolating the trend values and adding a business cycle term which may also be estimated from the past. It could also take care of psychological influences such as waves of optimism and pessimism (or waves of economic activity) in the society. I shall not go into the details here^l.