... other factors in favour of real wage increase is represented by z. The wage-setting curve is such that at low levels of unemployment, workers will push for more wages and this would increase the real wage levels, making us move up the wage setting curve, to a point where it comes closer to the labour contrain, L. Figure 1. Wage Setting, given Price Level Money wages on the other hand is set by the producers who set wages in accordance to their mark up, µ. The price-setting relation is given by P = W (1 +µ). Therefore, real wages, W/P is equal to 1/ (1 + µ) . The inverse relationship between real wages and the markup indicates that the higher the markup leads to a decrease in real wages, because prices, P, are pushed by a higher markup and hence money wage, W, when divided by P to obtain real ...

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