The efficiency wage model can be modified to allow real wages to vary over the business cycle by assuming that
A)workers' effort may depend on the unemployment rate and the real wage.
B)during a recession, labor supply will decrease, reducing the efficiency wage.
C)during a recession, productivity will fall, causing a reduction in the efficiency wage.
D)during a boom, labor demand will increase, causing the efficiency wage to rise.

Question

Quizplus · Accepted Answer

The efficiency wage model can be modified to reflect the business cycle by assuming that workers' effort may depend on the unemployment rate and the real wage. During a recession, when the unemployment rate is high, workers may work harder to retain their jobs, and as a result, employers may be willing to pay a higher efficiency wage to motivate workers. Conversely, during a boom when labor demand is strong, workers may have more bargaining power and may not need a high efficiency wage to keep them motivated. Therefore, real wages may vary over the business cycle in response to changes in labor market conditions.

The Efficiency Wage Model Can Be Modified to Allow Real