1. The existence of unemployment (a) Suppose previously the unemployment rate was relatively high. But now things change: the unemployment rate becomes very low this year. What change happens in terms of the relative bargaining power of workers and firms when the unemployment rate becomes very low? What do your answers imply about the average wage as the unemployment rate gets very low, given expected price and actual price constant? (b) Given your answer to part (a), why is there unemployment in the economy? (What would happen to real wages if the unemployment rate approached zero? Suppose the expected price and actual price remain constant.)
Added by Richard F.
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This is because there are fewer available workers for firms to choose from, so workers have more leverage to negotiate for higher wages and better working conditions. As a result, the average wage is likely to increase as the unemployment rate gets very low, Show more…
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