Last year Canada's economy had a surge in exports and increased demand for additional economic outputs. Because of the great demand, industry's now have a labor shortage and wages have begun to rise. If you are looking at Canada's macroeconomy through the lense of a neoclassical economic understanding, what you will expect to see over time?

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17 February, 00:18

Last year Canada's economy had a surge in exports and increased demand for additional economic outputs. Because of the great demand, industry's now have a labor shortage and wages have begun to rise. If you are looking at Canada's macroeconomy through the lense of a neoclassical economic understanding, what you will expect to see over time?

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Mugsy · Answer 1

Neoclassic economists believe that both wages and prices are sticky (hard to change) only int he short run. In the long run, both prices and wages will adjust to new economic conditions.

In this particular case, neoclassic economists will predict that even though wages are starting to rise, in the long run the equilibrium wage will be higher.

Long run and short run are economic concepts that do not refer to a given time period, e. g. long term in accounting means more than 1 year, but long run in economics may take years to come.

Long run refers to the amount of time it takes for an economic variable to adjust to economic changes.

If Canada's increase in labor costs is paired with an increase in productivity (usually new technologies), then the economy should be able to grow since private consumption and investment will increase due to higher wages.