Consider the labor market shown here. If an efficiency wage of $45 is instituted:

A)10,000 fewer workers will be hired.
B)10,000 more workers will be hired.
C)it will have no effect on the market, and 15,000 workers will be employed.
D)the number of workers who are fired will double.

Question

Consider the labor market shown here. If an efficiency wage of $45 is instituted:

A)10,000 fewer workers will be hired. 
B)10,000 more workers will be hired. 
C)it will have no effect on the market, and 15,000 workers will be employed. 
D)the number of workers who are fired will double.

Quizplus · Accepted Answer

At the current wage rate of $35, there is an excess supply of labor of 10,000 workers (30,000 workers are willing to work but only 20,000 are demanded by firms).

If an efficiency wage of $45 is instituted, firms will only be willing to hire workers who are "good enough" to earn this higher wage. This will increase the productivity of workers and reduce turnover, but it will also reduce the quantity of labor demanded by firms.

Since the demand curve is downward-sloping, an increase in wage rate will lead to a decrease in quantity demanded. Therefore, if the wage rate increases from $35 to $45, the quantity of labor demanded will decrease from 20,000 to 10,000.

Thus, 10,000 fewer workers will be hired.

Consider the Labor Market Shown Here