Question

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to: a. no change in the real wage and no change in unemployment. b. no change in the real wage and a rise in unemployment. c. a decrease in the real wage. d. no change in the real wage and a fall in unemployment.

Answer 1

Answer:

The correct answer is b. no change in the real wage and a rise in unemployment.

Explanation:

If the real wage were rigid then the real wage would not change although unemployment would increase. Unemployment would increase due to that the demand labor would have decreased therefore widening the gap between demand for labor and supply for labor which is unemployment.

Answer 2

Answer:

B) no change in the real wage and a rise in unemployment.

Explanation:

Both wages and prices are sticky, and even though the optimal solution for this scenario would be a decrease in the real wage and no change in the unemployment rate, this is not applicable to real life. No one accepts a pay cut, it is easier to lay off workers (increase in unemployment) than to lower the wages.

Usually the factors that cause a leftward shift of the labor demand curve are:

1. a decrease in the demand of the goods produced by labor activities
2. technological changes that decrease the use of labor
3. increase in the price of the other factors of production (land + capital)

In this case, option 3 is the most likely option.

Since wages are sticky, so the price will not change, then the number of employed people must decrease, which results in higher unemployment.