Question

Given the effects of COVID-19, some predict that the U.S. economy will contract 1.6% in the first quarter and 2.5% in the second quarter. Some estimates portray a more gruesome picture.

A record 6.65 million people filed a new jobless claim in the week that ended March 28. While 40% of Americans would have trouble covering an unexpected $400 expense, according to a survey by the Federal Reserve.

Part 1.

Explain, using the diagram below, how all this would impact wages in the medium term. Refer to the diagram and mention the changes in demand and/or supply of labor to explain the effect in equilibrium wages.

Equilibrium Wage ( W1) Equilibrium Employment (L1)

Complement your answer provided in Part 1 with a more "microeconomic" illustration of the changes (if any) on wages. In other words, would the value of the marginal product of labor (VMPL) change? Why so? How would this affect the equilibrium wage?

Answer 1

As the en rate decling production production demand y do each woce rate Employment e economy contracts the growth declines and this reduces uction linel. Secline in Wage duction level will shift the rate mand cwine left wards as Wett ensor demanded will fall at ~ wage rate and thus new quilibrium will occur at point E L where equilibrium wage rate rate and employment level in the economy has decreased. This reduces both the price level and Marginal product of labor. Ume, and this value of Marginal wage broduct of Labor curve will rate shift leftwards to UMP' and enen decrease in wage rate will reduce amount of labor employed in labor market. I UMPL 4 by Labor