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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.
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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