Based on our understanding of the wage- setting equation, which of the following will not cause a decrease in the nominal wage?
A) A decrease in expected productivity.
B) An increase in unemployment.
C) A decrease in unemployment benefits.
D) A decrease in the expected price level.
E) An increase in the minimum wage.

Question

Quizplus · Accepted Answer

An increase in the minimum wage would lead to an increase in the nominal wage, not a decrease. The wage-setting equation states that the nominal wage is positively related to expected productivity, and negatively related to unemployment benefits and the expected price level. An increase in unemployment (choice B) would decrease the bargaining power of workers and lead to a decrease in the nominal wage. A decrease in expected productivity (choice A) would also lead to a decrease in the nominal wage. A decrease in unemployment benefits (choice C) would increase the supply of labor and reduce the bargaining power of workers, leading to a decrease in the nominal wage. A decrease in the expected price level (choice D) would reduce the cost of hiring workers and lead to a decrease in the nominal wage.

Based on Our Understanding of the Wage- Setting Equation, Which