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Wages

The PRICE of LABOUR. In theory, wages ought to change so that the SUPPLY and DEMAND in the labour market are always in EQUILIBRIUM. In practice, wages are often sticky, especially in a downward direction: when demand for labour falls, wages do not fall. In this situation, the fall in demand results in higher involuntary UNEMPLOYMENT. Trade UNIONS may use collective bargaining to keep wages above the market-clearing rate. Furthermore, many governments impose a MINIMUM WAGE that employers must pay.

FIRMS may choose to pay above the equilibrium wage to increase the PRODUCTIVITY of workers. Such so-called EFFICIENCY WAGES may make workers less likely to join another firm, so cutting the employer's hiring and training costs. They may encourage workers to do a better job. They may also attract a higher quality of worker than wages at the market-clearing rate; better workers may have a higher RESERVATION WAGE (the lowest wage for which they are willing to work) than the market-clearing equilibrium.

In recent years, employers have tried to reduce wage stickiness by increasing the proportion of pay that is linked to the performance of their firm. Thus if falling demand reduces the employer's PROFIT the pay of its employees falls automatically, so it does not have to lay off as many workers as it otherwise would. Performance-related wages can also reduce AGENCY COSTS by giving hired hands a stronger incentive to do a good job.

Wealth effect

As people get wealthier, they consume more. This wealth effect has important consequences for MONETARY POLICY. When there is an INTEREST RATE increase, future INCOME from ASSETS such as EQUITIES must be discounted at a higher rate than before. As a result their owners feel poorer and spend less. A cut in interest rates has the opposite effect. Economists disagree on the wealth ELASTICITY of CONSUMPTION: how much consumer spending would rise if wealth increased by, say, 1%. Different consumers may have different wealth elasticity. If most of the increase in wealth goes to poorer people this may have a different wealth effect than if most of it went to people who are already wealthy. The source of the wealth increase may also matter. If SHARE PRICES rise or interest rates fall, consumers may be slow to spend out of their increased wealth if they think the increase may be temporary. However, if they think a sharp rise in share prices is permanent and the stockmarket then tumbles, the result may be that consumption falls by enough to cause a RECESSION. The wealth effect of rising HOUSE PRICES is particularly uncertain.

Weightless economy

At the start of the 21st century, the total OUTPUT of the American economy weighed roughly the same as it did 100 years earlier. Yet the value of that output, in REAL TERMS, was 20 times greater. Output is increasingly weightless, produced from INTELLECTUAL CAPITAL rather than physical materials. Production has shifted from steel, heavy copper wire and vacuum tubes to microprocessors, fine fibre-optic cables and transistors. SERVICES have increased their share of GDP. This weightless or dematerialised economy, most economists agree, is not just lighter but also more efficient.

Welfare

Americans use welfare as shorthand for GOVERNMENT handouts to the poor. Economists use it to describe the well being of an individual or society, as in 'Are tax cuts welfare-enhancing?'. This is economist-speak for 'Will tax cuts improve the overall well being of the country?'

Windfall profit

A controversial concept, often used by politicians to justify imposing a TAX on PROFIT that in theory is earned unexpectedly, through circumstances beyond the control of the company concerned, and is thus deemed undeserved and ripe for the taking by the tax authorities. As the profits were neither expected nor a result of the efforts of the firm, taxing them should not harm the firm's incentives to maximise future profits. The problem comes when greedy politicians start claiming that profits are windfalls when in fact they are deserved and expected. Then taxing them sends a signal to FIRMS that they should not try too hard to make profits, as if they do too well they will not get to keep the profits anyway. If this became widely believed, effort would probably decline and economic GROWTH would be slower.

Withholding tax

A tax that is collected at source, before the taxpayer has seen the INCOME or CAPITAL to which the tax applies. In other words, that part of the income or capital due in tax is withheld from the taxpayer, who therefore cannot easily avoid paying the tax. Withholding taxes are frequently imposed on INTEREST and DIVIDENDS.

World Bank

An institution created with the IMF at BRETTON WOODS in 1944 and opened in 1946. The World Bank has three main branches: the International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA) and the International Finance Corporation (IFC). Collectively, it aims to promote economic development in the world's poorer countries through advice and long-term lending, averaging $30 ­billion a year, spread around 100 countries.

Critics of the World Bank say that it often worsens the problems facing DEVELOPING COUNTRIES. Its advice has often been guided by economic fashion, which led it to support a centrally planned brand of DEVELOPMENT ECONOMICS in the 1960s and 1970s, before switching to PRIVATISATION and STRUCTURAL ADJUSTMENT in the 1980s and then to promoting democracy and economic TRANSPARENCY, and attacking CRONY CAPITALISM, in the late 1990s. Until recently, it has generally supported big, ­high-profile projects rather than more economically useful smaller schemes. It has often failed to ensure that its loans have been spent on the intended project. Its willingness to pump money into struggling countries creates a potential MORAL HAZARD, in which politicians may have little incentive to govern well because they believe that, if they do a bad job, the World Bank will come to the rescue. The increase in private-sector lending to and INVESTMENT in emerging markets has led to growing discussion of whether the World Bank is any longer needed.

World Trade Organisation

Bête noire of anti-globalisation protesters. The World Trade Organisation is the governing body of international trade, setting and enforcing the rules of trade and punishing offenders. Established during the Uruguay Round of talks under the GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT), it opened for business in 1995 with a membership of 132 countries (rising to 146 by 2003). Countries used to break GATT rules with impunity. They seem to be finding it harder to do so under the WTO. Even so, protestors complain that it does not promote fair trade but does promote the interest of rich countries over poorer one. Supporters of free trade, including The Economist, reckon that all countries are better off as part of a well-regulated international trading system, and that the WTO is the most likely source of the good regulation that is needed.