Final answer:
Wage increases alone would likely cause the AS curve to shift to the left due to higher production costs. However, if increased worker productivity accompanies wage increases, the AS curve can shift to the right as firms are able to produce more with the same quantity of labor.
Step-by-step explanation:
When discussing how wage increases and worker productivity affect the Aggregate Supply (AS) curve, it is important to understand the dynamics involved. If the labor market tightens and wages increase without any rise in productivity, the AS curve is expected to shift to the left, as higher wages mean higher production costs, which typically leads to less output at each price level. However, if this wage increase is accompanied by a rise in worker productivity, the effect on the AS curve can be different.
When worker productivity increases, firms are able to produce more output at every price level, resulting in a shift of the AS curve to the right. This is due to the fact that improved productivity allows the same quantity of labor to produce more output, thus enhancing economic efficiency. An increase in productivity can offset the effects of higher wages, allowing the AS curve to maintain its position or even shift to the right, depending on the relative magnitudes of the wage increase and productivity growth.
According to the long-run neoclassical analysis:
Increased wages without a corresponding increase in productivity typically result in a leftward shift of the AS curve. However, with increased productivity, the full employment level corresponds to a higher level of potential GDP, meaning the long-run AS (LRAS) curve shifts to the right. Therefore, wages and productivity growth combined can lead to an expansive economic outcome with increased potential GDP.