Wage Response in Tight vs. Slack Labor Markets
Explain why a one-percentage-point decrease in the unemployment rate typically results in a larger increase in the real wage when the initial unemployment rate is low compared to when it is high.
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An economy experiences a policy change that reduces the unemployment rate by one percentage point. According to the wage-setting model, under which of the following initial conditions will this reduction in unemployment cause the largest increase in the real wage required to motivate workers, and what is the primary reason for this effect?
Wage Response in Tight vs. Slack Labor Markets
Analyzing Wage Responses to Unemployment Changes
The wage-setting curve becomes steeper at lower unemployment rates primarily because individual firms' productivity increases more rapidly in a tight labor market.