Question

Reduction in minimum wage will tend to cause which of the following?

A. upward shift in WS curve
B. upward shift in PS curve
C. downward shift in WS curve
D. downward shift in PS curve

Answer 1

A reduction in minimum wage tends to cause a downward shift in the wage-setting (WS) curve because it decreases the wage rate that workers and unions are willing to accept for any given unemployment rate.

Step-by-step explanation:

When a reduction in minimum wage occurs, it affects the supply and demand for labor. If employers can pay workers less, then they may decide to hire more workers, which would increase the supply of labor compared to the demand. This situation would typically lead to a downward shift in the wage-setting (WS) curve, meaning that for any given rate of unemployment, the wage rate that workers and unions are prepared to accept is lower.

In economic terms, the WS curve represents the relationship between wage levels and the rate of unemployment, taking into account factors like labor productivity, expectations of inflation, and the bargaining power of workers. A reduction in the minimum wage would weaken workers' bargaining power, resulting in a downwards shift of the WS curve, not the price-setting (PS) curve, which is related to firms' output prices and productivity.

So, the correct answer to the question would be C. downward shift in WS curve.

Answer 2

A reduction in minimum wage causes a downward shift in the wage-setting (WS) curve since firms can now pay lower wages and are willing to employ more workers at each possible wage rate.

The correct option is C.

Step-by-step explanation:

A reduction in minimum wage will tend to cause a downward shift in the wage-setting (WS) curve, which is essentially the relationship between the wage rate that firms choose to pay and the level of employment.

The WS curve represents the wage rates that firms are willing to pay for different levels of employment based on productivity, bargaining power, and institutional factors, such as minimum wages. When the minimum wage is reduced, the legal floor on wages is lowered, which allows firms to offer lower wages.

As a result, they are willing to employ more workers at each possible wage rate, leading to a shift down and to the right of the WS curve, which corresponds to answer C.

In contrast, the product supply (PS) curve reflects firms' willingness to supply goods based on factor costs, and a change in minimum wage would not directly lead to an upward or downward shift of the PS curve as it is related to the price of the output rather than the price of labor.

The correct option is C.