The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.
FIGURE 30-1
-Refer to Figure 30-1. The economy begins with D0 and S0. Suppose there is a positive shock to the economy which shifts the demand for labour curve to D2. Which of the following explains why the wage might rise only to $11 but not enough to clear the market?
1) Firms may find it costly to make large changes in wages.
2) Wages are set only infrequently in contracts and are thus slow to respond to changes in demand.
3) The wage rate is slow to adjust when there are long-term employment relationships.

Question

The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.
  FIGURE 30-1
-Refer to Figure 30-1. The economy begins with D0 and S0. Suppose there is a positive shock to the economy which shifts the demand for labour curve to D2. Which of the following explains why the wage might rise only to $11 but not enough to clear the market?
1) Firms may find it costly to make large changes in wages.
2) Wages are set only infrequently in contracts and are thus slow to respond to changes in demand.
3) The wage rate is slow to adjust when there are long-term employment relationships.

Quizplus · Accepted Answer

All three reasons explain why wages might not adjust quickly to clear the market: firms may avoid large wage changes due to costs, infrequent wage setting in contracts can delay adjustments, and long-term employment relationships can slow wage rate changes.

The Labour Market in the Diagram Below Begins in Equilibrium