Use the WS and PS relations to examine the effects of the following events on the natural rate of unemployment and on the real wage. Be sure to explain the effects of the event on the WS and PS relations. Do not post problem sets on other places.

a. A new U.S. trade policy with a hope to protect American workers decreases international trade and makes product markets less competitive in the U.S.
b. A new law that bans the formation of labor unions has been passed.

A) since the new U.S trade policy decreases international trade and makes product markets less competitive in the U.S . hence this affects the PS equation and PS curve. PS curve ( W/P ) = 1 ( 1 + u ) . here U > 0 due to the decrease in market competition. hence the PS curve will shift downward from PS to PS’ and the equilibrium points will shift from A to A’. while the real wage will be lower i.e. from r to r’ and the natural rate of unemployment will be higher i.e. from Un to Un' ( image 1 )

B) When the new law that bans the formation of labor unions has been passed the power of the union weakens and this will affect wage setting (WS) curve. Hence The WS curve will shift leftward from WS to WS’ also, the equilibrium point will change from B to B’. Since the PS curve is horizontal, at this new level of equilibrium, the real wages will remain unchanged, while the natural rate of unemployment will be reduced from Un to Un’.

Explanation:

A) since the new U.S trade policy decreases international trade and makes product markets less competitive in the U.S . hence this affects the PS equation and PS curve. PS curve ( W/P ) = 1 ( 1 + u ) . here U > 0 due to the decrease in market competition. hence the PS curve will shift downward from PS to PS’ and the equilibrium points will shift from A to A’. while the real wage will be lower i.e. from r to r’ and the natural rate of unemployment will be higher i.e. from Un to Un' ( image 1 )

B) When the new law that bans the formation of labor unions has been passed the power of the union weakens and this will affect wage setting (WS) curve. Hence The WS curve will shift leftward from WS to WS’ also, the equilibrium point will change from B to B’. Since the PS curve is horizontal, at this new level of equilibrium, the real wages will remain unchanged, while the natural rate of unemployment will be reduced from Un to Un’.