Employers would like to make adjustments whenever a different combination of factors would improve returns. Changes in the use of capital are generally based on relatively long-term payoffs. To the extent that labor contracts fix wages and restrict layoffs, the use and costs of labor are not changeable in the short term, leaving the employer with what it believes is a suboptimal combination. If negotiations result in increased wages, the employer can be expected to reduce the use of labor and potentially increase the use of capital. Figure 8.3 shows a graphical example of