Practice 10 marley and scrooge find that the costs of

Practice
10. Marley and Scrooge find that the costs of screening, hiring, and training workers is substantial. To
reduce labor turnover, they pay higher-than-average wages. Their behavior is consistent with the
explanation of unemployment.
(a) minimum wage
(b) efficiency wage
(c) imperfect information
(d) cost effectiveness
ANSWER: (b) Refer to p. 265 [577] for more on efficiency wage theory.
11. If, due to imperfect information, firms set the wage above the market-clearing level,
12. Refer to the diagram used in Question 2 above. If the government imposed a minimum wage of $4,
OBJECTIVE 4:
Use the AS / AD model to explain the Phillips Curve and the short-run trade-off between the
unemployment rate and the inflation rate as it appeared in the 1950s and 1960s and to explain why
the relationship collapsed after that.

Chapter 14 [29]: The Labor Market in the Macroeconomy 103
same single factor—the level of demand. The analysis rested on the fact that the AS curve had been fairly
stable. In the 1970s and 1980s, supply-side factors (particularly the price of imported oil and inflationary
expectations) became more volatile and the stable inflation-unemployment relationship collapsed. Higher
prices for imported inputs shifted the AS curve to the left; similarly, as the inflationary expectations of
workers and producers increased, wages and prices were increased in response, pushing the AS curve to the
left and disrupting the Phillips Curve relationship. (page 266 [578])