Question

According to the wage-setting relation, a decrease in the unemployment rate ___ the worker's bargaining power and consequently ___ the real wage. 

In the figure on the right, demonstrate the wage-setting relation graphically.

1. ) Using the 3-point curved line tool, draw the wage-setting relation. Label your curve 'WS'.

Carefully follow the instructions above and only draw the required object.

Now suppose that the unemployment benefits become less generous. In this case, the wage-setting relation shown in the graph will shift ___.

Answer 1

According to the wage-setting relation, a decrease in the unemployment rate STRENGTHENS the worker's bargaining power and consequently RAISES the real wage. 

Draw a downward sloping line and label it 'WS.'

Now suppose that the unemployment benefits become less generous. In this case, the wage-setting relation shown in the graph will shift DOWNWARD.