Question

The nurses are on strike in Minneapolis. Suppose they win a substantial wage increase from their job action and that the model of short-run labor demand applies.

a. Use the model to explain imply about the likely impact on employment? Hint: use a graph representing the model to make the case.

b. Cite and explain two variants of efficiency wage theory to explain why such an impact on employment may not occur. Illustrate your points with graphs.

Answer 1

a)

• Substantial rise in minimum wage would cause rise in cost of production. Thus, output level and employment opportunities would fall. fall in output and employment opportunities would cause rise in price level.

Following is diagram:

In above diagram, rise wage would cause shift in supply curve to left which signify fall in output and employment opportunities.

b)

Efficiency wage refers to the system where rise in wage rate leads to the rise in the productivities of workers. Hence, rise in wage cause rise in output level. following is diagram:

Above diagram shows rise in wage increases productivities of workers. thus output rises from Q1 to Q2.