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December 17, 2018 

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WHAT?: One of three basic questions of allocation (the other two are How? and For Whom?). Answering the 'What?' question of allocation determines the types and quantities of goods and services produced with society's limited resources. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? The production possibilities analysis sets the stage for answering the 'What?' question.

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OVEREMPLOYMENT:

The condition in which resources are more actively engaged in the production of goods and services than they are willing and able to at current prices. This condition is most important for short-run macroeconomic activity and short-run aggregate market analysis. In particular, overemployment is a key reason for the positive slope of the short-run aggregate supply curve. Overemployment is a primary reason the macroeconomy is able to produce MORE than full-employment production in the short run.
The key for overemployment rests with the purchasing power of the wages (and other resource prices) received by labor (and other resource owners). In particular, workers engage in productive activities based on the real, purchasing power of their wages. These real wages are based on nominal wages relative to the price level. Higher real wages entice workers to increase the quantity supplied of their labor. As such, they can be enticed to generate more production.

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.
In both cases, workers are overemployed. They are actually working harder and producing more than they would at full employment.

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Recommended Citation:

OVEREMPLOYMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 17, 2018].


Check Out These Related Terms...

     | inflexible prices | short-run aggregate supply | short-run aggregate supply | short-run, macroeconomics | change in real production | slope, short-run aggregate supply curve |


Or For A Little Background...

     | aggregate supply | unemployment | gross domestic product | price level | full employment | macroeconomic markets | resource markets |


And For Further Study...

     | full employment, long-run aggregate supply | long-run, macroeconomics | long-run aggregate supply curve | slope, long-run aggregate supply curve | aggregate supply determinants | aggregate market analysis | aggregate market | change in aggregate supply | aggregate supply shifts | business cycles | circular flow | Keynesian economics | monetary economics | short-run aggregate supply and market supply |


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