The role of profitability and industrial wages in firm level wage determination

<p>The level of real wages is one of the key variables-perhaps the key variable-in the economy. Understanding the processes by which wage levels are determined has proved a major task for economists, both theoretical and applied. Much of the effort has taken place within the context of the 'NAIRU' (or non-accelerating inflation rate of unemployment)paradigm. According to this view, the long-run or 'natural' rate of unemployment is determined by the supply side. This would include incentives to work provided by the social security system as well as demographic factors-in Friedman's celebrated phrase, it is the rate that is 'ground out by the Walrasian system of equations' (Friedman, 1968).</p>