Equilibrium in the labor market, Macroeconomics

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Q. Equilibrium in the labor market?

Equilibrium in the labor market 

Real wage W/P will be equal to the equilibrium real wage in the classical model

Without trade unions andgovernment intervention, labor market would always be in equilibrium in the classical model. This means that real wage will be equal to equilibrium real wage - the level of real wage that will equilibrate labor demand and labor supply. 

1039_Equilibrium in the labor market.png

Figure: Equilibrium in the labor market

It's also clear from the graph that total amount of labor L is concluded in labor market. When real wage is equal to equilibrium real wage, supply of labor is equal to demand for labor and this is the amount which would be used in the production. We then have full employment.

If real wages are higher than equilibrium real wage, demand for labor would be less than supply. Difference is the amount of unemployment beyond natural rate of unemployment. In equilibrium, there is hence no 'involuntary' unemployment in classical model.


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