Suppose demand conditions in industries X and Y are identical but that productivity increases by 5% in industry X and 2% in industry Y.If economy-wide productivity and the average wage each rise by 3%,we should expect that unit labor costs will:

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Quizplus · Accepted Answer

Unit labor costs measure the labor cost per unit of output produced. They are calculated by dividing the total labor costs in an industry by the total output. If productivity increases, output increases while labor costs remain the same or decrease. Thus, if productivity increases by 5% in industry X and 2% in industry Y, unit labor costs should decrease in industry X and increase in industry Y. A 3% increase in economy-wide productivity and average wage is not enough to offset the productivity gains in industry X, so unit labor costs should still decrease. On the other hand, the increase in average wage could partially offset the productivity gains in industry Y, leading to an increase in unit labor costs. Therefore, we should expect unit labor costs to decrease in industry X and increase in industry Y.

Suppose Demand Conditions in Industries X and Y Are Identical