4. In the (neo) classical theory, the intersection between the demand curve for labor and the supply curve of labor determines the "equilibrium real wage" ( Remember that the real Nominal Wage wage is the ratio between the nominal wage and the price level Consumer Price Index Therefore, the excess supply of labor (unemployment) is explained by wage rigidities that prevent the self-correction mechanism in the labor market. According to the neoclassical theory, should real wages increase or decrease in order to reduce the unemployment rate? Explain.

Principles of Economics 2e
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Chapter21: Unemployment
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4. In the (neo) classical theory, the intersection between the demand curve for labor and the
supply curve of labor determines the "equilibrium real wage" ( Remember that the real
Nominal Wage
wage is the ratio between the nominal wage and the price level
Consumer Price Index
Therefore, the excess supply of labor (unemployment) is explained by wage rigidities that
prevent the self-correction mechanism in the labor market. According to the neoclassical
theory, should real wages increase or decrease in order to reduce the unemployment rate?
Explain.
Transcribed Image Text:4. In the (neo) classical theory, the intersection between the demand curve for labor and the supply curve of labor determines the "equilibrium real wage" ( Remember that the real Nominal Wage wage is the ratio between the nominal wage and the price level Consumer Price Index Therefore, the excess supply of labor (unemployment) is explained by wage rigidities that prevent the self-correction mechanism in the labor market. According to the neoclassical theory, should real wages increase or decrease in order to reduce the unemployment rate? Explain.
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