Question

1.

a. If you were an employer would you favor a law which forces you to increase your employee’s wages each year by the same % as the inflation rate? Explain for us.

b. The Real wage rate is expressed in 1980 dollars. In 2015 this was almost $8 per hour while the nominal wage rate was close to $20 per hour. Using these two graph lines, would you say that the standard of living for most Americans has gotten better? Explain your response and give an example supporting it.

Answer 1

a.

Yes, employees salary should grow by at least inflation every year.

Increase in salary of employees will be an increase in cost to the employer, this will reduce profits for the employer. Still, employees should be given the raise of at least inflation rate.

Instead of cutting costs by not giving raise to employees, there must be other ways of cost cutting too. Rather, the focus should be to increase revenue more than inflation rate, so that margins increase even if employees are given inflation raise in salaries.

b.

From 1980, 8$ per hour

To 2015, 20$ per hour

This growth has been in last 35 years.

Calculating Compounded annual growth rate = (20/8)^(1/35) - 1 = 2.65%

Suppose, Inflation rate in United States in last 35 years is 3%

Now, growth in salaries < average inflation

This suggests that standard of living has not gotten better.