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Slide 1
A supply and demand graph is shown, with Quantity of Labor on the x axis and Wage Rate on the y axis. The original demand curve is labeled D0. An equilibrium point, E, is shown at Q0 and W.

Let's see what happens when instead of a surprise decline in productivity, there's an unexpected rise in productivity. 

The initial graph shows the original demand curve, D0.  At the intersection of D0 and the supply curve, a quantity Q0 of labor is supplied at a wage rate of W.

Productivity has been the same from year to year, so the intersection of the labor market is at point E, where the demand curve for labor (D0) intersects the supply curve for labor. As a result, real wages are not increasing and employers and workers have come to accept the equilibrium wage level (W).

Then productivity increases unexpectedly, shifting demand for labor from D0 to D1.

At least for a time, however, wages are still being set according to the earlier expectations of no productivity growth, so wages do not rise.

A supply and demand graph is shown, with Quantity of Labor on the x axis and Wage Rate on the y axis. The original demand curve is labeled D0. An equilibrium point, E, is shown at Q0 and W. A new demand curve, D1, is shown to the right of D0.
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