Price level and labour market

Price level and labour market have a very tight correlation. The labour market can determine the cost of production as well as the potential consumption power of the population. When the demand for labour force increases, the wage level is likely to increase, so the cost of production increases; on the other hand, when the wage level increases, the consumers are going to have greater budgets to afford more consumption, when the consumption level increases, the price level in the market is going to increase as well. Therefore, the wage level in the labour market and the price level in the markets are moving towards the same direction. Moreover, when the wage level and the price level both increase, it usually takes place during an economic boom period. This may be a partial reason for why there is an inflation during an economic boom.

However, the difference between the wage level and the income level changes is determined by the productivity in the labour market. When the productivity increases, the extent of the change in the price level is likely to be smaller than the extent of the change in the wage level. When the labours are more productivity, their outputs will increase, so their wage increases are reasonable. In addition, when the outputs increase and the marginal costs of many goods and services are diminishing, the costs of production will maintain at their previous levels or even decrease, as the average spending on labour forces decreases when the scale of production increases.