Suppose that in some country, there is a negotiated real wage that is above the level...

Suppose that in some country, there is a negotiated real wage that is above the level where the supply and demand for labor are equal. Describe how each of the following developments will affect normal employment.

a) The government requires firms to provide employees with a new benefit, such as paid family leave.

b) Improvements in the educational system increase workers’ skills.

Expert Solution

The negotiated real wage is above equilibrium real wage which means that labor supply is higher than labor demand and unemployment exists in the market .

a) If the government mandates that firms have to provide employees with a new benefit such as paid family leave then the cost of firm rises . The overall wage rises . Since cost of production rises , firm will hire lesser to cut down on cost . This will accentuate the problem of unemployment .

b) Improvements in educational system increases the worker's skills . This means that productivity of workers improve . This increases employment opportunity for all educational levels and promotes economic growth . Skill development leads to more production , which leads to expansion of economy and thus absorbs more labor .

Rahul Sunny answered 2 years ago

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