Economics
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89. In macroeconomic analysis, the possibility of economic equilibrium with a degree of unemployment is ordinarily assumed. But in microeconomic analysis, we generally postulate that prices must be such to clear markets. Is it possible to give microeconomic explanation for unemployment, without calling upon wage rigidities due to government or union action to keep wage rates from falling? Show how it is, if it is.

Answer:

Save government and union action, there might be the influence of "efficiency wages." This describes the attempt by firms to compete in employing labor above the market price to attract the best workers and incentivize them to become more productive. Furthermore, wages are not as easily cut as other rents to factors of production since this particular factor has feelings and can hold grudges. This artificially high level of wages would result in a surplus of labor, thus causing unemployment.

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