When their employment and resulting production exceed full-employment levels, overemployment results. This can happen for a couple of reasons:

• First, workers might be temporarily fooled into thinking the purchasing power of their wages has increased, when in reality it has not. While workers generally have close, personal knowledge of their nominal wages, especially when cashing paychecks, they are likely to have less information about the price level. A boost in nominal wages can temporarily lead them to believe that their real wages have also increased, but only because they do not recognized that the price level has increased. Because they THINK their real wages are greater they increase the quantities of their labor supplied. People work harder when they get paid more. And when they work harder, they produce more.


• Second, the purchasing power of the wages received by workers might actually increase, temporarily. This results because all wages and prices do not increase at the same pace. For example, a higher price level might prompt a few employers to pay their workers higher wages. These workers, as such, receive higher nominal wages NOW. Given that the price level has also increased, the presumption is that real wages received by these workers have not changed. However, the price of the goods and services these workers actually buy might not increase along with the overall price level. The prices that workers pay might increase LATER. Because workers really ARE receiving greater real wages NOW, they increase the quantities of their resources supplied. Once again, people work harder when they get paid more. And when they work harder, they produce more.