Suppose that households wealth increase because the value of

Suppose that households wealth increase because the value of their assests (homes, stocks, land, etc.) have increased. As a result of this shock our model of the labor market predicts that

A.the equilibrium real wage will rise B.the equilibrium real wage may fall, rise, or stay the same C.equilibrium employment will rise D.equilibrium employment may fall, rise, or stay the same

Solution

Suppose that households wealth increase because the value of their assets (homes, stocks, land, etc.) have increased. As a result of this shock our model of the labor market predicts that:

A. the equilibrium real wage will rise

B. the equilibrium real wage may fall, rise, or stay the same

C. equilibrium employment will rise

D. equilibrium employment may fall, rise, or stay the same

If Households Wealth Increases – the labour market predicts:

                An increase in household wealth will decrease the supply of labor, shifting the labor supply curve to the left, which increases the equilibrium wage and decreases the quantity of labor. In the following graph, this is represented by a shift from S2 to S1.

                Decreased skill level of workers will decrease the demand for labor, shifting the labor demand curve to the left, which decreases the equilibrium wage and decreases the quantity of labor. In the following graph, this is represented by a shift from D2to D1.

                When these two events occur at the same time, we know for sure that the equilibrium quantity of labor will decrease. The new equilibrium real wage may increase, decrease, or stay the same, depending on the magnitudes of the changes in demand and supply.