If the labor supply curve is upward-sloping,an adverse supply shock causes ________ in employment and ________ in the real wage.
A)no change,a decrease
B)a decrease,a decrease
C)a decrease,no change
D)a decrease,an increase
E)an increase,an increase

Question

Quizplus · Accepted Answer

An adverse supply shock causes a decrease in productivity, and it increases the production cost of a firm. The higher the cost, the smaller the profit for the firm. Thus, the firm reduces its labor demand, resulting in a decrease in employment. As supply shock reduces the quantity of output, the price level tends to increase, leading to a decrease in the real wage. As a result, the labor supply curve shifts to the left. Therefore, an upward-sloping labor supply curve will have a decrease in employment and a decrease in the real wage due to an adverse supply shock.

If the Labor Supply Curve Is Upward-Sloping,an Adverse Supply Shock