Question

According to the neoclassical theory of distribution, a worker’s real wage reflects her productivity. Let’s use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers, Pf and Pb be the prices of food and haircuts, and Af and Ab be the marginal productivity of farmers and barbers.

Over the past century, the productivity of farmers Af has risen substantially because of technological progress while the productivity of barbers Ab has remained constant.

What happened to the farmer's real wage? barbers' real wage?

Assuming perfect mobility, what does this imply for the nominal wages of farmers and barbers?

What do previous answers imply for the price of haircuts relative to the price of food, PbPf?

Suppose that barbers and farmers consume the same basket of goods and services. Who benefits more from technological progress in farming--farmers or barbers? Explain how your answer is consistent with the results on real wages in parts (b) and (c).

Answer 1

With the increase in the marginal productivity of the farmers because of technological progress, the real wages of the farmers will increase. But since the marginal productivity of the barbers is still the same, so their real wages will not increase.

The nominal wages of the farmers or the barbers will remain unaffected even after the technological progress in farming because they will get the same amount for offering their labour per hour.

With the increase in marginal productivity of the farmers, the production of food will increase. So this will reduce the prices of the food products. But the prices of haircut will have no effect.

The barbers will benefit more from the technological progress in farming. The reason for this is that the technological progress did no change in the prices they are getting for haircuts but they will now be able to buy more food with reduction in the price of food.