|Question||During the 1980s and 1990s, the average rate of un-employment in Europe was high. Some economists claimed that this rate was in part the result of “real-wage rigidity,” a situation in which unions kept real wages above their market-clearing levels.
a. Accepting for the sake of argument that real wages were too high in Europe in the 1980s and 1990s, show how this would lead to unemployment (a situation where people who would like to work at the going wage cannot find jobs).
b. What is the effect of real-wage rigidity on the output actually supplied by firms, relative to the output they would supply if there were no real-wage rigidity?