The Puzzle of US Unemployment and Declining Competition
The WS-PS model predicts that reduced market competition, which causes a downward shift in the price-setting (PS) curve, should lead to higher structural unemployment. However, this contradicts the empirical evidence from the US, where unemployment did not rise and may have even fallen during the period of declining competition. This discrepancy between the model's prediction and observed reality presents an economic puzzle.
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Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
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The Puzzle of US Unemployment and Declining Competition
Impact of Reduced Market Competition on Unemployment
In an economy, firms with more market power tend to set higher prices relative to their production costs. If a long-term trend leads to a general decrease in competition across industries, allowing the average firm to increase its pricing power, what is the most likely consequence for the labor market equilibrium, holding workers' bargaining power constant?
A macroeconomic model analyzes the relationship between wages, prices, and employment. Imagine a scenario where, over time, industries become more concentrated, leading to a general decrease in the level of competition among firms. Arrange the following statements to describe the logical sequence of events that leads to a new labor market equilibrium, according to the model's predictions.
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