Refer to the following figure when answering the following questions.
Figure 7.4: Labor Market
-Consider the labor market depicted in Figure 7.4. The wage, fixed at , is called ________ and ________.

Question

Refer to the following figure when answering the following questions.
Figure 7.4: Labor Market 
-Consider the labor market depicted in Figure 7.4. The wage, fixed at  , is called ________ and ________.

Quizplus · Accepted Answer

The wage, fixed at a certain level, is a wage rigidity. Such rigidity creates unemployment because more workers are willing to work at the going wage rate than there are jobs available. This results in an excess supply of labor or unemployment. Wage rigidity increases labor market volatility as it can lead to more severe fluctuations in employment and output over the business cycle. Hence, option D) correctly describes the wage rigidity and its impact on unemployment and labor market volatility.

Refer to the Following Figure When Answering the Following Questions