Government programs like unemployment gives individuals an incentive, and the means, not to work. Everyone that is unemployed has a “reservation wage”, or the minimum wage he or she will accept before working a specific job. Other assistance programs increase the reservation wage by giving incentive to the unemployed to remain unemployed if the reservation wage is not met. First off, there are two different types of relationships between price, expected price, and wage, wage setting relationship and price setting relationship. Wage setting relationship is the idea that unemployment increases when nominal wage decreases. Price setting relationship is the idea that when price level and ages increase, wage remains constant.
