Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 28, Problem 2.1P
To determine
Labor market changes in the absence of sticky wages
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Suppose that a country experiences a reduction in productivity – that is, an adverse shock to the production function.A) What happens to the labor demand curve? Show the change on the graph.B) How would this change in productivity affect the unemployment rate if the labor market is always in equilibrium?Explain your answer referring to the graph.
Do you think it is rational for workers to prefer sticky wages to wage cuts, when the consequence of sticky wages is unemployment for some workers? Why or why not? How do the reasons for sticky wages explained in this section apply to your argument?
Assume that the total productivity in our country decreases (a negative shock to the production function).
a) Using a graph, What happens to the demand curve for labor?
b) Using a graph, How would the decline in productivity affect the labor market (employment, unemployment and real wages), if labor market is always in equilibrium?
c) Using a graph, How would decreases in productivity affect the labor market if unions prevented the decline in real wages?
Chapter 28 Solutions
Principles of Economics (12th Edition)
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- Graphically explain the concept of wage rigidity. How is this related to steady state unemployment in the economy?arrow_forwardHowever, the labor market is a derivative of the goods market in the Keynesian theory (“principle of effective demand”). Therefore, unemployment is explained by the lack of demand in the goods market. According to the Keynesian theory, what would happen to the unemployment rate if real wages fall? How should unemployment be reduced?arrow_forwardDoes it make sense that the definition of macroeconomic equilibrium allows the existence of involuntary unemployment? Would you not expect that, in such a case, wages would fall, which would lead to an increase in the demand for labor and hence the elimination of the involuntary unemployment?arrow_forward
- However, the labor market is a derivative of the goods market in the Keynesian theory (“principle of effective demand”).Therefore, the unemployment is explained by the lack of demand in the goods market.According to the Keynesian theory, what would happen to the unemployment rate of real wages fall? How should unemployment be reduced?arrow_forwardVirtually all economists and policymakers agree that, within limits, higher employment is better. If this is true, couldn't the government create more employment by hiring people to dig holes and fill them in again? Is this good economic policy?arrow_forwardExplain why employers pay a lower efficiency wage when unemployment is high. How would the efficiency wage change in an economy if it became easier to monitor the work that employees did? Other than to incentivise workers to put in effort, can you think of any other reasons why wages might be higher when unemployment is low (i.e. an upward-sloping wage-setting curve)?arrow_forward
- While economists measure unemployment at the macroeconomic level, microeconomic forces are often responsible for this macro aggregate. In other words, the tie between microeconomics and macroeconomics is inevitable when discussing the level of unemployment in an economy. Suppose the following graph represents the market for unskilled labor in a fictional economy. These workers typically represent the young, inexperienced, or uneducated part of the labor force and are therefore most effected by changes in the unemployment rate. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this grapharrow_forwardThe actual unemployment rate exceeds the natural rate of unemployment. What are policymakers concerned about in this situation?arrow_forwardSuppose that a country experiences a reduction in productivity--that is, an adverse shock to the production function. (This example should sound familiar!)a. What happens to the labor demand curve?b. How would this change in productivity affect the labor market--that is, employment, unemployment, and real wages--if the labor market was always in equilibrium?c. How would this change in productivity affect the labor market if unions prevented real wages from falling?arrow_forward
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