One possible explanation for higher natural rates of unemployment in Western Europe than the United States is stronger labor unions (see Chapter 8). Strong labor unions may also increase the severity...

One possible explanation for higher natural

rates of unemployment in Western Europe than


the United States is stronger labor unions (see


Chapter 8). Strong labor unions may also increase


the severity of a business cycle by increasing wage


stickiness. Draw a graph of the aggregate labor


market in equilibrium. Then assume that the


demand for labor decreases due to an economic


downturn and that nominal wages and prices


are sticky in the short run. Show the effect on


the quantity of labor employed and the quantity


unemployed.




May 18, 2022
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