Explain why an increase in the wage rate for autoworkers will generate more of a negative employment response in the long run than in the short run

The answer to this question is based on understanding the impact of output and substitution effects in the labor market. Wages are a part of the cost of production, and when they go up, so does the cost of production of a good and its price. Therefore, higher wages in the automotive sector would increase the cost of producing cars and their prices. From the law of demand, higher prices would reduce quantity of cars demanded, so car producers would be selling less cars, and, as a result, would need fewer workers. Therefore, demand for workers (labor) would go down.

This is known as an output effect: higher wages reduce output, reduce the demand for labor, and increase unemployment. Since higher wages make workers more expensive for employers, they start looking for a relatively cheaper substitute for labor, which is capital. Therefore, firms would decrease the number of people they hire and would buy more capital used in the production of cars.

The above is known as a substitution effect: higher wages make firm substitute more labor for more capital, which increases unemployment. In the short run, the amount of capital is fixed; therefore, automakers would be willing to substitute labor for capital only in the long run. Thus, the negative effect of higher wages would be more prevalent in the long run rather than short run.