Final answer:
A reduction in unemployment benefits will tend to cause a downward shift in the wage-setting curve (WS), as individuals are prompted to accept lower wages or seek employment more actively.
Step-by-step explanation:
A reduction in unemployment benefits is likely to create an incentive for unemployed individuals to seek employment more actively or to accept lower-wage jobs. From an economic perspective, this behavior suggests a downward shift in the wage-setting curve (WS), as workers are willing to work for less due to the reduced safety net of unemployment benefits.
This effect can be understood in the context of neoclassical economic theory, which posits that in the long run, markets adjust and wages become more flexible. Therefore, a reduction in unemployment benefits may lead to short-run impacts such as an increased supply of labor at lower wages, which shifts the wage-setting curve downward. Over time, as the supply of labor increases and wages adjust downward, employers may find it easier to hire at lower wages, potentially reducing unemployment but also exerting downward pressure on wage levels.