University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 3

The concept being addressed in this question is related to real wage unemployment, which occurs when wages are artificially set above the market equilibrium level. When wages exceed the equilibrium, it results in a situation where the quantity of labor supplied exceeds the quantity of labor demanded. This surplus of labor means that there are more individuals seeking jobs than there are positions available, leading to unemployment among those individuals.

Real wage unemployment highlights the role of wage rigidity, where wages do not adjust downward even in the face of high unemployment. This can happen due to minimum wage laws, union contracts, or other factors that prevent wages from reaching their free-market level. The consequence is a mismatch between supply and demand in the labor market, causing some workers to remain unemployed despite their willingness to work at the prevailing wage.

Understanding real wage unemployment helps in analyzing labor market dynamics, especially when considering how economic policies can influence employment levels through wage adjustments.