+1 862 207 3288 A sudden rise / low in the price of his good welcomes response from the producer. The direction of his response depends on whether the change in price is permanent or temporary. If the rise in selling price is permanent (implying permanent rise in real wage), labor will not be willing to supply more labor. Attributing this change to be a permanent change, there will be no change in the level of employment. For a given temporary rise in the price of good today will producer to work more today and enjoy leisure later when the prices come back to their normal level (when opportunity cost of time will be less).
In another situation, a temporary fall in the price of the good the producer will have less incentive to produce today and postpone his production for future when the price of his goods will rise. This suggests that a small and temporary change in real wages will lead to more employment fluctuations.
Lucas considers the model in which labor market clears. labor always remains on his supply curve and there is no existence of involuntary unemployment. If labor supply is highly sensitive to changes in wages and prices, employment fluctuations are more than less sensitive labor supply conditions.
