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International Economics, Second Edition by Paul Torelli

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CHAPTER 4

Industrialization, Globalization, and Labor Markets

Introduction

In standard models of labor markets, wages are equal to the “marginal product” (or incremental output) of an additional unit of labor. In other words, the amount a worker earns is equal to the amount he or she can produce. Intuitively, firms take on workers until the productivity of their last hire is equal to the market wage rate. If the wage rate were below productivity, firms would find it profitable to hire more workers, whereas if the wage were above productivity, firms would have an incentive to shed workers. Under this reasoning, more productive workers get paid more, which implies that labor productivity growth ultimately leads to wage growth in the long term. ...

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