Labor and wages received by labor tie to the CPI and unemployment numbers. All companies are concerned with labor, as are the government and the Federal Reserve.The more labor intense the production process is for a given the greater will be their need for employees. .A firm will often base their hiring practices upon the elasticity of the labor market available to them.The employer will benefit from high unemployment. This means they can hire a more qualified worker at a lower wage. The lower the unemployment level the more inelastic the labor supply will become. This means labor can command a higher wage, because labor will be in a shorter supply.

The demand for labor in a given industry will depend upon the market structure of the firm.The marginal revenue and not the price will determine how much is produced and how much labor will be paid.If the incremental increase is not great enough the decisionmay be made to level out production.The marginal revenue concept is the concept that governs contrived scarcity in certain markets. Marginal differences are discussed in the microeconomics course. They measure the monetary differences between two quantities.

Mercedes Benz limits car imports because the resulting marginal revenue decrease makes it less profitable to import or produce more cars.This is the reason utilities are controlled and monopolies and price structures are often fixed.If an electric utility were able to limit production, they could charge higher prices and there would be a certain fraction of the population that would not be able to afford the service.In fact, electric rates tend to increase in the summer time as usage increases.Capacity is limited and in order to control use the utility raises the price causing the resulting decrease in demand.

Many factors effect a person's willingness to work at a given wage.The first thing we are concerned with is our income constraint.We all have this.Our constraint is the amount of wages that we earn.In theory I can spend no more than I earn (without borrowing) in a given time period.If I earn $100 then I can only spend $100.This leads us to two economic effects - the substitution effect and the income effect.Suppose my salary increases to $125.I now have more money to spend.Will I continue to work the same amount or will I work fewer hours.I spend my money on food, clothing, housing, transportation, education, leisure activities, and savings.The allocations are made in that order.We see homeless people, but they are always clothed and they must eat to live.Shelter comes next.After I have satisfied these basic desires, I can concentrate on transportation to get to work and school.Medical needs fit in about here also. Enhancing my education comes only after I have satisfied my other basic needs.I will then move on to things like leisure activities and vacation and I will begin to allocate a certain amount of my income to savings.

These ideas are incorporated into the CPI through the selection of goods that the CPI measures. If a good becomes scarce or more abundant, that price change will affect quantities purchased and this affects the CPI as consumers change preferences and may or may not be purchasing a good that is included in the CPI measurement. As wages increase higher levels of goods may be placed in the CPI and when wages decrease a lower level of good may be placed in the CPI. This is why we cannot look at just one indicator. We need to look at the indicators in relation to each other

Question: If people choose not to work because they can collect more on unemployment how might this affect the CPI? Or does it?