ECON 103 Intermediate Macroeconomics

II. The existence of unemployment

a. Suppose the unemployment rate is very low. How does the low unemployment rate
change the relative bargaining power of workers and firms? What do your answers imply
about what happens to the wage as the unemployment rate gets very low?
b. Given your answer to part (a), why is there unemployment in the economy? (Hint: What
would happen to real wages if the unemployment rate were equal to zero?)