Question

Explain what effect an increase in the unemployment benefits will have on the real wage based on: (1) the WS relation; and (2) the PS relation.

Answer 1

UNEMPLOYMENT RATE RELATED TO REAL WAGE . THE RELATIONSHIP CAN BE ESTABLISHED EITHER BY WAGE-SETTING REATION (WS RELATION ) OR PRICE-SETTING RELATION ( PS RELATION ).

BEFORE EXPLAINING EACH ONE INDIVIDUALLY I AM GONNA SHOW YOU A GRAPH PLOTTED BETWEEN UNEMPLOYMENT RATE ALONG X-AXIS AND REAL WAGE ALONG Y-AXIS THAT CARRIES SHAPE OF BOTH CURVES. (PS AND WS)

1. BASED ON WAGE SETTING RELATION

ACCORDING TO THE FUNCTIONAL RELATIONSHIP AS SHOWN IN PICTURE , WS CURVE IS PLOTTED ( CONTOURS ONLY ) .FROM THE SAMPLE GRAPH IT IS CLEAR THAT REAL WAGE IS DECREASING WITH INCREASE IN UNEMPLOYMENT RATE . ( AS A HIGHER EMPLOYMENT RATE IS NEEDED TO BRING REAL WAGES BACK TO WHAT THE COMPANY WILLING TO PAY FOR EMPLOYEES ).

2.BASED ON PRICE SETTING RELATION

PRICE CURVE IS LINEAR AND IS PARALLEL TO UNEMPLOYMENT AXIS .THIS JUST MEANS THAT WHATEVER IS THE UNEMPLOYMENT RATE , REAL WAGE REMAINS CONSTANT.THUS, NO RELATIONSHIP CAN BE ESTABLISHED.

HOPE IT'S ALL CLEAR.