Wage rate
Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Class 12, Ch 5 "Market Equilibrium"
Meaning
The wage rate is the price of labour. For a firm, it is the extra cost of hiring one more unit of labour, such as one more hour of work. It is set in the labour market, where households supply labour and firms demand it. The equilibrium wage rate is the wage where the hours households want to supply equal the hours firms want to hire. A profit-maximising firm hires workers up to the point where the wage rate equals the MRPL (marginal revenue product of labour, the extra revenue one more worker brings in).
Example
A restaurant pays helpers ₹120 a day. Hiring one more helper adds ₹120 to its daily costs. If a helper quits and the local labour market is tight, the owner may have to offer a little above the going wage to attract a replacement.
Don't confuse with
- Salary: this is fixed, regular pay, usually monthly. The wage rate is the price of labour for each unit of time worked.
- Wage labour: this is labour that is bought and sold, which is a feature of a capitalist economy. The wage rate is the price at which that labour is bought and sold.
Related concepts
- Derived demand
- Demand for labour
- Marginal revenue product of labour
- Value of marginal product of labour
- Labour market
- Supply of labour
- Income-leisure trade-off
- Backward-bending labour supply curve
- Equilibrium wage rate