In the wage-setting/price-setting model, a recession reduces workers' bargaining power, causing a shift along the wage-setting curve to the right. This signifies a decrease in nominal wages, aligning with the economic downturn. The movement to the right reflects weakened employee negotiation abilities, resulting in lower wages. In this scenario, the overall economic conditions lead to adjustments within the existing wage-setting framework rather than a shift in the curve itself.
In a recession, characterized by rising unemployment, the wage-setting/price-setting model sees a movement along the wage-setting curve to the right. This signifies a decrease in nominal wages as workers face reduced bargaining power due to higher unemployment rates. In this context, the wage-setting curve represents the relationship between the real wage rate and the unemployment rate. The shift to the right indicates a decrease in the real wage rate, reflecting the economic downturn. The rationale behind this lies in the dynamics of supply and demand in the labor market during a recession.
As unemployment rises, the pool of available workers expands, leading to increased competition for jobs. With a surplus of labor, workers find themselves in a less advantageous position when negotiating for higher wages. Employers, facing a larger supply of potential employees, can offer lower wages without losing qualified workers. This scenario is captured by the movement along the wage-setting curve, illustrating the adjustments in nominal wages in response to changing economic conditions.