Suppose the government introduces a subsidy on firms’ sales (e.g. for every $1 of output sold, firms receive an additional 5 cents from the government). Keeping everything else constant, what do you expect to happen according to the frictionless labor market model?
A drop in wages and an increase in employment.
An increase in wages and a drop in employment.
A drop in both wages and employment.
An increase in both wages and employment.