The existence of unemployment

a. Consider Figure 7-6. Suppose the unemployment rate is very low. How does the low unemployment rate change the relative bargaining power of workers and firms? What do your answers imply about what happens to the wage as the unemployment rate gets very low?

Figure 7-6

b. Given your answer to part (a), why is there unemployment in the economy? (What would happen to real wages if the unemployment rate were equal to zero?)

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Real wage, W/P +m Un Price-setting relation - PS Ws Wage-setting relation Unemployment rate, u