6. The Two Faces of Wages, and Unemployment

In micro, a wage was a cost the firm pays, and a price that slipped out of place snapped right back. In macro, a wage is a cost and a household's income at the same time, and prices are held in place by menu costs. Two models let you touch the fallacy of composition the wage's two faces create, and how quantities and jobs end up absorbing shocks when prices will not move.

• The Two Faces of a Wage: One Firm vs the Whole Economy — In micro, a wage is a cost the firm pays. In macro, that same wage is also the household's income. One firm that cuts wages can hire more people. But what if every firm cuts at once? Customers' wallets get thinner, and goods stop selling. In the end, the jobs themselves vanish. The formula below traces that chain. For example, a corner 🏪 bakery that cuts 💵 pay can afford one more helper. But if every shop in town cuts pay, customers have less to spend and 🍞 bread stops selling. Then helper jobs disappear too.
• Menu Costs: When Prices Won't Move — In micro, an out-of-place price moved at once. In macro, the cost of changing price tags holds prices still. Changing a price means reprinting the menu. Shops hate that cost, so they put up with small losses. Only a shock past the threshold below makes them move. While prices stay frozen, sales and jobs take the hit instead. For example, ✏️ pencils at the 🏪 stationery shop cost 500 won. Costs creep up a little, but the owner leaves the tag alone. Rewriting every tag is more trouble than the small loss. Instead, the shop simply stocks fewer pencils.