Question

According to our labor demand - labor supply model, the steady increase in productivity in the U.S. since World War 2 implies __________in equilibrium wages and __________ in equilibrium labor.

		a decrease / an increase
		an increase / a decrease
		an increase / an ambiguous response (either an increase or a decrease)
		an ambiguous response (either an increase or a decrease) / an increase

Answer 1

When there is an increase in the productivity, there is an increase in the demand for labour. This is expected to raise the real wage rate and the equilibrium quantity of labour demand and supplied. Therefore we expect that the equilibrium wages and equilibrium labour both will increase.

However there has been a reduction in the labour force due to decrease in male participation rate. This indicates that the supply of labour must have reduced. There is expected decline in the quantity of labour and an increase in the wage rate.

This indicates that wage rate is increased but labour quantity may or may not change. Third option is correct.