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.