Real vs. Nominal Wage Outcomes
Imagine an economy where unemployment is at a record low, and labor unions successfully negotiate a 4% nominal wage increase for their members. Explain the likely reaction of businesses to this wage increase and describe the ultimate effect on the workers' purchasing power.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Wage Negotiations and Purchasing Power
In an economy with very low unemployment, a union successfully negotiates a 6% increase in nominal wages for its members. The union leaders and members based this negotiation on an expected inflation rate of 2% for the upcoming year. However, firms across the industry respond to the higher labor costs by raising their prices, leading to an actual inflation rate of 6% for that year. Which of the following statements best analyzes the outcome for the union members?
Real vs. Nominal Wage Outcomes
In a low-unemployment economy, if firms increase prices by the same percentage as a recently negotiated nominal wage increase, workers will be satisfied because their real wage has remained constant.