Labor Cost Per Unit of Output
Exercises

Questions and Exercises

1. Go to the Diagrams and Data section of this Internet site for unit labor cost and review the diagram entitled "Annual % Change in Unit Labor Cost x Annual % Change in Real Compensation." Explain why unit labor cost was rising, yet real worker compensation was declining, during 1980 through 1982.

2. Briefly explain why a decline in unit labor cost can be expected to produce an increase in real GDP.

3. Can a rise in unit labor cost be expected to produce an increase or a decrease in stock indices such as the S&P 500? Briefly explain. Note that unit labor cost increased relatively sharply in 1984-1985, 1988, and again in 1993. Access the data series for S&P 500 at Economagic and write down the annual percent change in the S&P 500 in 1984-1985, 1988, and 1993. Are these data consistent with your argument?

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