Suppose that a technological decline makes labor less productive. What is likely to happen to wages and to potential output?

Question

Quizplus · Accepted Answer

If labor becomes less productive, the economy produces less output and therefore, potential output decreases. If wages don't decrease in proportion to the decrease in productivity, then labor costs per unit of output will be higher, leading to higher prices. This can result in reduced demand for goods and services, which further reduces potential output. Therefore, the most likely outcome is that wages will decrease along with potential output.

Suppose That a Technological Decline Makes Labor Less Productive