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Chapter 8: Q 35 (page 215)

While unemployment is highly negatively

correlated with the level of economic activity, in the real world it responds with a lag. In other words, firms do not immediately lay off workers in response to a sales decline. They wait a while before responding. Similarly, firms do not immediately hire workers when sales pick

up. What do you think accounts for the lag in response time?

Short Answer

Expert verified

Firms never immediately start layoffs or hiring.

Step by step solution

01

Step 1. Introduction

Firms always want to be sure of change in their sales are positive or negative . They always want to see a positive change. Many decisions are based on these change but they never take immediate decision even if in economic recession.

02

Step 2. Reason

When there is economic recession and a negative change in firms sales it does not start layoffs immediately because there is some significant costs involved in hiring new workers and training them. Similarly they do not hire new workers until they see a positive change.

03

Step 3. Conclusion

this is reason why they always want to be sure of changes in sale before doing layoffs and hiring new workers. Because of this there is a lagged response.

04

Step 4. Other reasons

Some times because firm has entered into long term contracts with employees which is also a reason they cannot lay-off workers.

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