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In the wage-setting model, individual firms' human resources departments determine the nominal wage. This wage is set at a level sufficient to attract and motivate employees to work diligently, known as the 'no-shirking' wage. The real wage, which represents the purchasing power of this nominal wage, is calculated by dividing the nominal wage by the economy's overall price level. This resulting real wage corresponds to a point on the wage-setting (WS) curve, reflecting the prevailing unemployment rate.

The Wage-Setting Process and the 'No-Shirking' Wage

A manufacturing firm operates in a region where the unemployment rate has recently dropped significantly due to the opening of several new factories. The firm's management is concerned that its employees might become less productive. From the perspective of a model where wages are set to ensure employee effort, explain why the firm's concern is justified and what specific action it should take regarding the nominal wage it pays its workers.

Wage-Setting in a Changing Labor Market

In an economic model where firms set wages at a level just high enough to motivate employees and prevent them from slacking off, what is the most likely impact of a sustained increase in the economy-wide unemployment rate?

In an economic model where firms set wages just high enough to motivate employees and prevent them from slacking, a higher unemployment rate generally allows firms to offer a lower wage. Beyond the unemployment rate, identify and explain one other factor that would compel a firm to offer a *higher* wage to achieve the same level of employee effort.

Factors Influencing the Wage-Setting Decision

In a model where firms set wages to prevent employee shirking, an unexpected, economy-wide increase in the general price level will immediately increase the real wage, assuming the nominal wage remains unchanged.

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