In an economy at its wage-setting/price-setting equilibrium, an unemployed individual, who is identical in skill to currently employed workers, approaches a firm and offers to do the same job for a slightly lower wage. According to the model, why is the firm most likely to reject this offer?
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Labor Market Equilibrium Scenario
In an economy at its wage-setting/price-setting equilibrium, an unemployed individual, who is identical in skill to currently employed workers, approaches a firm and offers to do the same job for a slightly lower wage. According to the model, why is the firm most likely to reject this offer?
The Stability of Labor Market Equilibrium
In the wage-setting/price-setting model of the labor market, a profit-maximizing firm will always hire an unemployed worker who offers to work for less than the prevailing equilibrium wage, as this directly lowers the firm's labor costs.