Question

Explain what effect an increase in the unemployment rate will have on the real wage based on: (1) the WS relation; and (2) the PS relation.

Answer 1

1)In the WS relation, the reduction in the unemployment rate will makethe real wage higher. Because the relation between unemploymentrate and the real wage is negative. The Wage-Setting relation represents relation between the realwage and the rate of unemployement. It has its particular shape because the relation between realwage and unemployement rate is negative. The real wage is measured on the vertical axis, and the unemployement rate is measured on the horizontal axis. The wage-setting relation is drawn as the downward-sloping curve WS (for wage setting). So, higher the unemployment rate, the lower the real wage and lower the unemployment rate the higher the real wage.

2)In the PS relation, it doesn't depend on the unemployment rate. That’swhy there is nothing effect on the real wages.