Answer to Question #130563 in Macroeconomics for Ashleene

Question

3) The percentage of workers whose wages are set by explicit contracts increases. This should

A) make it more difficult for the labor market to reach an equilibrium after a change in the demand for labor.

B) make it easier for the labor market to reach an equilibrium after a change in the demand for labor.

C) have no impact on the movement of the labor market toward equilibrium after a change in the demand for labor.

D) cause the labor market to always be at an equilibrium, even if there is a change in the demand for labor.

4) Employment contracts that stipulate workers' wages, usually for a period of 1 to 3 years, are known as

A) social contracts.

B) implicit contracts.

C) explicit contracts.

D) none of the above

Answer 1

3) B

When there is a change in the demand for labour, for example, a fall in the demand for labour in a recession, explicit contracts leads to lay offs. Layoffs will result in the elimination of excess labour supply in the market; labour supply falls. The fall in supply results in an increase in wage rate to compensate the initial fall caused by a fall in labour demand. These sequence of events will reduce the equilibrium labour supply in the market, but re-establishes the new equilibrium at the wage rate pegged, and fixed in the labour contracts between the employers and their employees.

The same happens when labour demand increases and pushes up the wage rate, firms reabsorb the temporarily laid off employs and supply increases, pulling the wage rate back to equilibrium. Thus, the labour market easily reach an equilibrium after a change in the demand for labour.

4) C

An explicit contract is a contract in which the terms and requirements that are binding between the employers and the employees are clearly stated in writing, agreed upon, and signed by all parties. Thus, wages are explicitly stated and remain binding during the contract period, usually one to three years.