Question

if this analysis is correct,namely that a reduction in wages will reduce the aggregate demand for goods, what assumption must we make about the relative proportions of wages and profits that are spent( given that a reduction in real wage rates will lead to a corresponding increase in rates of profit)? Is this a realistic assumption?

Answer 1

If it is given that the reduction in wages reduces the aggregate demand for goods, this means that the reduction in income reduces the income of the employees which in turn induce them to demand less and fewer goods. This decrease in wages basically reduces the purchasing power of the employees or workers.

Now, a fall in wages implies that the cost of the production in the industry is reduced, that means at the same price the corporations will now earn high profits. This will eventually benefit the employers and the position of the employees will get worse off. The assumption here that the reduction in the wages, will not directly reduce the price level in the market. The result will be the rich will become more rich and poor will become poorer, increasing the overall distribution gap of income in the economy.

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