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.
One cafe cuts its wage from to (labor demand , each worker brings in sales of ).
What happens to its jobs and profit?
Slide down the demand curve: at wage , workers; at wage , . Jobs rise by .
Profit is the per-worker margin times jobs: before, ; after, .
Costs down, headcount up, profit more than doubled.
But the whole calculation stands on one assumption — that customers' incomes stay put. The next problem removes it.
Now every cafe in the country cuts wages by at the same time.
In an economy with workers, output per worker , and MPC , what happens to jobs?
The claim is false — when every cafe cuts wages together, jobs do not rise; they fall from to
Counterexample and verification
First, income leaks out: workers each earning less shrinks the wage bill by , and consumption falls by of that, . The multiplier amplifies it: output falls by , from to .
Jobs are output divided by output per worker: . Wages were cut, yet jobs vanished.
The wage bill did not stop at the intended drop either — with wages and jobs falling together it lands at , a fall of .
The prescription that worked for one firm works in reverse for the whole: the fallacy of composition.