If wage rigidity holds the real wage above the equilibrium level, an increase in the demand for labor will ______ the number unemployed.
A) increase
B) decrease
C) not change
D) possibly increase, decrease, or leave unchanged

Question

Quizplus · Accepted Answer

Wage rigidity means that wages are set above their equilibrium level. In such a situation, an increase in the demand for labor would result in employers being willing to hire more workers at the given wage rate. However, since wages are held rigid (above their equilibrium level), employers will not be able to offer higher wages to attract additional workers. As a result, the excess demand for labor will translate into higher employment rather than higher wages. This means that the number of unemployed workers will decrease.

If Wage Rigidity Holds the Real Wage Above the Equilibrium