Skip to content

IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

Wages in an economy rise by 6% in a year while labour productivity rises by 2%. Assuming that firms pass on cost increases fully and labour is the only input, approximately what is the rise in unit labour cost and its implication for prices?

Unit labour cost rises by about 4%, being wage growth of 6% less productivity growth of 2%. If firms pass this on in full, prices come under cost-push pressure of roughly 4%. Adding the two figures would wrongly give 8%.

  1. AAbout 4%, which creates cost-push pressure on pricesCorrect
  2. BAbout 8%, which creates demand-pull pressure on prices
  3. CAbout 2%, which is neutral for prices
  4. DAbout 3%, which equals the average of wages and productivity growth
  5. About 12%, because both effects multiply fully

Explanation

Unit labour cost growth is approximately wage growth minus productivity growth: 6% - 2% = 4%. If firms pass this on, prices rise by about 4%. This is cost-push inflation, not demand-pull. Adding the figures wrongly gives 8%.

Did you get it right without looking?

One question tells you little. A timed set on Impact of macroeconomic policies on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Impact of macroeconomic policies on businessesFree diagnostic mock

More Impact of macroeconomic policies on businesses questions