Nature of Equilibrium Unemployment
Consider an economic model where an equilibrium is established based on the wage-setting and price-setting decisions of firms. At this equilibrium point, some level of unemployment persists. In your own words, explain why this unemployment is considered 'involuntary'.
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Graphical Representation of Involuntary Unemployment at Equilibrium
In an economic model, a stable situation is reached where the real wage that firms set to maximize their profits is exactly equal to the real wage required to motivate employees to work effectively. Despite this stability, a number of individuals who are seeking work remain unemployed. Which statement best explains why this unemployment is considered 'involuntary' within the logic of this model?
In the wage-setting/price-setting model, the unemployment that exists at the equilibrium point is a result of unemployed individuals demanding a wage higher than the one firms are offering.
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Confirmation of Involuntary Unemployment in the WS-PS Diagram