How does a decrease in real wage rates impact employer behavior?

A decrease in real wage rates typically makes labor less expensive for employers. As wage costs fall, the financial incentive for companies to hire more workers increases because they can afford to employ additional staff without incurring higher labor costs. This encourages employers to use more labor rather than capital, especially if labor is now seen as a more cost-effective option for meeting production needs.

Employers may also believe that lower wages can stimulate economic activity and increase demand for their goods and services, further motivating them to expand the workforce. A situation where wages are lower allows companies to potentially increase output, service levels, or even expand into new markets.

In contrast, choices that suggest reliance on capital or reducing the labor force do not align with the fact that cheaper labor generally encourages more hiring. Notably, the option suggesting that there would be no significant impact overlooks the strong relationship between wage levels and employment decisions within economic theory.