Final answer:
A significant increase in nominal wages can lead to higher real wages, which can have both a substitution effect (leading to increased labor supply) and an income effect (leading to decreased labor supply). The impact on the quantity of labor supplied depends on the relative strength of these effects.
Step-by-step explanation:
When there is a significant increase in the nominal wages that employers must pay their employees, it is likely to lead to higher real wages. Real wages take into account the effects of inflation and reflect the purchasing power of wages. An increase in real wages can have two effects on the quantity of labor supplied: a substitution effect and an income effect.
The substitution effect occurs when an increase in real wages makes leisure relatively more expensive, leading individuals to work more and substitute leisure for consumption. On the other hand, the income effect occurs when an increase in real wages makes individuals richer, allowing them to consume more goods and services and potentially choose to work less.
As a result, the impact on the quantity of labor supplied when real wages increase is uncertain. It depends on the relative strength of the substitution and income effects. If the substitution effect is stronger, the quantity of labor supplied will increase. Conversely, if the income effect is stronger, the quantity of labor supplied will decrease.